MUTUAL FUNDS INVESTMENT IN EMERGING MARKETS by huangyuarong

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									 MUTUAL FUNDS

   STRATEGIES
       IN

EMERGING MARKETS
Agenda

• Mutual funds and Emerging markets

• China
  – Citi strategy
  – SGAM strategy

• Latin America
  – Citi strategy
  – SGAM strategy
Capital Flow to Emerging markets
• “Emerging market" only came into common use
  in the 1980s

• Capital flows into developing countries have a
  much longer history.

• Private flows now constitute most of the capital
  going to emerging markets.

• Mutual funds one of the main channels for
  capital flows and investing in emerging markets
Emerging Countries
• IIF source
Definition of Mutual Funds



• Mutual fund is made up of money that is pooled
  together by a large number of investors who
  give their money to a fund manager to invest in a
  large portfolio of stocks and/or bonds.

• Mutual Funds offer investors a chance to
  diversify their portfolios.
Importance of mutual funds
Net new cash flow to all mutual funds
Mutual Funds in Emerging markets

•   Why Mutual funds invest in emerging markets:
    –   Strong Fundamentals in Emerging Markets
        Economies
    –   Emerging Market outperformed global equity
        indices since 2003.
    –   Rapid GDP growth
    –   Today’ s small caps are tomorrow’s Blue chip
    –   Emerging small caps outperformed developed
        small caps
    –   Diversification of portfolios
Strong Fundamentals in Emerging
Markets Economies


• High Level of foreign reserves

• Low Inflation

• Strong Investments

• Growth in Domestic Demand
Strong Fundamentals in Emerging
Markets Economies
Emerging Market outperformed global
equity indices since 2003
Rapid GDP Growth
  China

« The overinvestment problem in China is more about better investment
   rather than less investment »

• China's economic reform will enter a fourth decade next year. The year of
  2008 is unlikely to be the turning point of China’s fast growth, but it could be
  the beginning of a set of transitions

• Investment growth could stabilize around 25% despite further tightening on
  credit growth and policy rates

• The three key investment themes for 2008 and beyond are revaluation,
  mergers and acquisitions, and consumption

• Renminbi appreciation will likely dominate portfolio investment and direct
  investment
Economic forecast overview 2006-2008F
Strategy
• The fund's investment objective is long-term growth of
  capital

• The fund seeks to meet its objective by investing at least
  80% of its assets in a diversified portfolio of equity and
  equity-related transferable securities

• The fund considers various factors when determining
  whether a company has substantial exposure to China
          – it is organized under the laws of China
          – it has a principal office in China
          – it derives 50% or more of its total revenues from business in
            China
          – its equity securities are traded principally on a stock exchange
Strategy
• When choosing equity investments for this Fund, the manager
  applies a "bottom-up" value-oriented, long-term approach

• The fund manager also considers a company's price/earnings ratio,
  profit margins and liquidation value

• When the fund manager believes market or economic conditions are
  unfavorable for investors, the manager may invest up to 100% of the
  Fund's assets in cash, cash equivalents or other high quality short-
  term investments
• the fund's investments may include investments in derivative
   instruments

• Derivative instruments may have the effect of leveraging the fund's
  portfolio
Strategy
• A significant amount of the Fund's total assets may be invested in
  securities listed on one of the two stock exchanges in the People's
  Republic of China and/or securities listed on the Hong Kong Stock
  Exchange

• Securities listed on the Exchanges are divided into two classes of
  shares:
    *A shares, ownership of which is restricted to Chinese investors
  and foreign investors who have obtained a Qualified Foreign
  Institutional Investor (QFII) quota
    *B shares, which maybe owned by both Chinese and foreign
  investor

• The fund expects that its direct investments in securities listed on
  the Shanghai and Shenzhen stock exchanges will be through B
  shares
Risks & Drawbacks


• Economic and Political Risks of Investing in China

• Interest rate risk

• Currency/Exchange Rate Risk, the fund may buy or sell
  currencies other than the U.S. Dollar and use derivatives
  involving foreign currencies in order to capitalize on
  anticipated changes in exchange rates

• Availibilty of information, less information publicly
  available about China companies than about most U.S.
  companies
China strategy - SGAM
• Overview
   – Portfolio including 30 to 40 equities of “Great China” (China, HK
     & Taiwan)
   – Quality management, attractiveness, valorization & growth
     perspective

• Long term investment in “Great China” area

• China: Equity market cannot be ignored

• Strong knowledge in Chinese equity management (strategy
  launched in 1996)

• Team based in Singapore linked to Chinese local network
Why China?

• China is the engine of world growth
• Strong economic growth (+ 11,1% GDP in 2006)
    – Forecasted to be around this number in 2007

• Markets slow down in US & Europe
    – China has improved

• Strong capital markets

• Great diversification source

• Enhance management of public company

• More privatizations
                                                          Investment area
Initial Investment area                                     700 equities
1500 equities of listed
      companies                                            Research area
                                                            150 equities
     Filtering via market capitalization &
                    liquidity                           Final research area
                                                            200 equities


                                                      Equity ranking with criteria
                                             Top management ability
                                             Balance sheet quality
                                             Sector perspective
                                             Growth perspective
                                             Level of valorization



Portfolio (30 to 50 equities)                             Purchases
Fund pros

• Portfolio composed of 30 to 50 equities (best
  opportunity of the market)

• Team management with more than 20 years of
  experience
•
• Deep knowledge of the local market

• Strong risk management crucial to outperform
  the index
                       Performance


       Year to date   3 months       1 year    3 years    5 years

Fund    +59,46%       +7,92%         +81,28%   232,36%   +481,75%



                      Fund performance
Latin America
           “upgrading Peru to Overweight from Neutral”

• The equity market is underpinned by Peru’s solid macro
  fundamentals

• GDP growth is forecast to hit 7.9% this year. The fiscal and current
  account surpluses for 2007 are forecast at comfortable levels of 3%
  and 1.8% of GDP respectively

• While Peruvian inflation is rising – in line with other countries in the
  region – it remains under control at 3.4% in 2007
• Peru’s ROE, at 37.6% currently, as the highest across the emerging
  markets (Indonesia comes next at 26.7%). Also, Peru has seen a
  massive improvement in its average ROE from 10.5% in 2003
                         ROE Model

• Over the long-term, it pays to invest based on ROE levels

• The quartile of Latin American companies under coverage with the
  highest ROE has returned 1,200% in dollar terms since end-2002

• Latin American valuations remain attractive relative to other regions
Latin america


• Brazil remains our top pick in the region

• Although Brazilian ROEs have risen little since 2002, they have
  remained at respectable levels of 17.0%-19.2%.

• Latin America has the highest ROE (18.9%) in GEMs rising 706%
  since the September 2002 market bottom compared to +395% for
  EMEA and 311% for Asia.
Strategy - SGAM

• Fund launched on January 2007
  – Belief in Latin America as SGAM started a new fund


• Long term investment in attracting countries
  – Brasil, Mexico, Argentina, Colombia and Peru


• Goal
  – Outperform MSCI EM Latin America index
Investment strategy & management
process

• Take advantage of great potential growth in
  Latin America
  – Fundamental analysis & rigorous risk management


• Investment process in 3 steps
  – Macro-economic analysis
  – Sector analysis
  – Equities selection
                     Macro-economic analysis

Country scenario          Regional scenario         International scenario




                           Sector analysis


            Local tendency                World tendency




                          Equities selection


              Technical                      Fundamental
               Analysis                        Analysis


                             Portfolio
Key points
• Markets affected by volatility (November)

• Currency plummeted
   – Real & pesos (Chili & Columbia)

• Commodity suffered losses
   – Negative impact on Latin American countries which export
     commodity
   – Except for wheat + 7,8% & corn + 3,3%

• Best performance
   – Telecommunication, Energy & Finance
      • M&A potential in the near future
      • Companies are healthy & could have 2 digits growth rate…

								
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