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Emerging Markets Small Cap Asset Class Louisiana Association of Public Employees' Retirement Systems

P R E S E N T S. Emerging Markets Small Cap Asset Class Louisiana Association of Public Employees' Retirement Systems. September 17, 2012. One-on-One Use Only. Presenters. Emerging Markets Small Cap Asset Class: Introduction. Long term structural advantages in Emerging Markets

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Emerging Markets Small Cap Asset Class Louisiana Association of Public Employees' Retirement Systems

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  1. P R E S E N T S Emerging Markets Small Cap Asset Class Louisiana Association of Public Employees' Retirement Systems September 17, 2012 One-on-One Use Only

  2. Presenters

  3. Emerging Markets Small Cap Asset Class: Introduction • Long term structural advantages in Emerging Markets • What is Emerging Markets Small Cap? • Changing demographics and rising wealth in Emerging Markets: How will they spend it? • Asset class still immature – the opportunity awaits

  4. Please Ask Questions!

  5. Emerging Markets Small Cap: Solid Structural Trends Emerging Markets' position in the world Population Density Share of GDP Share of World Market Cap Source: IMF World Economic Outlook Database, 2009 data, MSCI Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. See other important disclosures at the end of this presentation. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  6. Emerging Markets Small Cap: Driving Global Growth As of June 30, 2011 Source: IMF Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. See other important disclosures at the end of this presentation. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  7. Emerging Markets Small Cap: Fiscal Advantage 2010 Government Debt as a % of GDP vis-à-vis Government Balance as % of GDP Source: MS Economic Team, Morgan Stanley Research. **Government Debt data for Asian and LatAm countries is from IMF Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. See other important disclosures at the end of this presentation. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  8. What is Emerging Markets Small Cap?

  9. Emerging Markets Small Cap: Asset Class Background • Question we hear and you may be asking: • Why do we need dedicated Emerging Markets Small Cap? We already have EM managers as well a dedicated ISCAP managers, both of whom can invest in small cap. Evolution of Emerging Markets over last 20 years – focus has moved from small cap to large cap Source: FactSet, MSCI; small cap in this example defined as below $3bn. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information.

  10. MSCI EM Index – Contribution to Return • Does this make sense? Narrow Market Leadership • June 30, 2010 – June 30, 2012 • 73% of Index return driven by Index top 20 Source: FactSet, MSCI, IBES. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. It should not be assumed that securities identified were or will be profitable or that decisions we make in the future will be profitable. Certain securities may not remain in the portfolio at the time that you receive this report. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market condition. A full list of holdings is available upon request.

  11. Emerging Markets Small Cap: Top-Bottom Quintile Index Performance Spread As of December 31, 2011 302 300 214 200 140 120 100 80 60 40 20 0 Source: FactSet, MSCI, S&P. *MSCI EM Small Cap Index was launched May 31, 2007. 2008 was its first full year of data. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information.

  12. MSCI Emerging Markets Small Cap Index: Regional & Sector Exposure As of June 30, 2012 Regional Exposure Seek higher exposure to stronger GDP growth prospects within the Asia/Pacific region. Sector Exposure Aside from the low Telecomm. Services weight, the MSCI EM Small Cap Index is more oriented toward domestic demand than the MSCI EM Index. There is little direct exposure to Energy. MSCI Emerging Markets MSCI Emerging Markets MSCI Emerging Markets Small Cap MSCI Emerging Markets Small Cap Consumer Disc. Consumer Staples Energy Financials Health Care Industrials Info. Technology Materials Telecomm. Services Utilities 12 Source: Factset, MSCI. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  13. MSCI Emerging Markets Small Cap Index: Domestic Demand Exposure As of June 30, 2012 Domestic Demand Exposure: Consumer Discretionary + Consumer Staples + Industrials Higher direct exposure to growing Emerging Markets domestic demand and consumption trends through EM small cap stocks. 13 *Total reflects all countries in the Index. Source: Factset, MSCI Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  14. Changing Demographics & Rising Wealth in Emerging Markets: How Will They Spend It?

  15. Emerging Markets Small Cap: The Middle Class Impact China’s Growing Wealth Source: Euromonitor, Morgan Stanley Research. E = Morgan Stanley Research estimates. December 2010. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. See other important disclosures at the end of this presentation. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  16. Emerging Markets Small Cap: Personal Consumption Patterns & Emerging Markets *IMF forecasts aggregate GEM GDP/capita to rise from $7000 to $9000 from 2010 – 2014E Sources: BEA, INSEE, Ministry of Internal Affairs & Communications, Credit Suisse Research. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Stocks presented for illustrative purposes only and are not a recommendation to buy or sell the securities listed. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  17. Emerging Markets Small Cap: Personal Consumption Patterns & Emerging Markets When did the U.S., France, & Japan progress from $7,000 to $9,000 in per capita income? • U.S. • 1934 - 1939 • 1949 - 1956 • France • Japan • 1961 - 1965 Sources: BEA, INSEE, Ministry of Internal Affairs & Communications, Credit Suisse Research. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  18. The Rise of the Middle Class: Spending Patterns How will they spend it? Based on data tallied by CLSA, the main sectors in which people in the poorest investable Asian countries wish to spend more are: Change in Behavior Technology Food Housing Home Goods Health Care Transport Emerging Markets Small Cap Companies • Kingsoft: • online gaming • Lewis: • furniture • IPCA Labs: • drug maker • Ford Otosan: • car maker • Thai Union Frozen: • seafood • Asia Cement: • cement Emerging Markets Companies • Steinhoff: • furniture • Samsung: • consumer electronics • Cemex: • cement • Hyundai Motor: • car maker • Brazil Foods: • poultry & pork • Sun Pharmaceuticals: • generic drugs Change in Productivity Productivity Savings Education Emerging Markets Small Cap Companies • Compartamos SAB de CV: • Mexican bank • Educomp: • training programs • Turk Traktor: • tractors Emerging Markets Companies • Sime Darby: • tractors • Haci Omer Sabanci Holdings: • diversified bank • No large cap pureplay in the industry Source: Sectors - CLSA September 2009; Topics and breakout of companies – The Boston Company Asset Management, LLC. Securities identified are for illustrative purposes only, not a recommendation to buy or sell these securities. It should not be assumed that any of the securities discussed herein represent investment advice, that the securities will continue to be perform as they have in the past, or that any investment recommendations or decisions we make in the future will be profitable or reflective of the investment performance of the securities discussed herein.

  19. Bottom of the Pyramid: Asia Emerging Market Newly Minted Middle Class: Investment Philosophy Rich Income Pyramid Middle Class Bottom of the Pyramid (BoP) • The number of households in the BoP in the poorest investible Asian countries* is ~124m. • If BoP incomes in each country rise from the current 80th percentile to the 60th, it is expected to generate an incremental: $65 billion in consumer spending • EXAMPLE: Indonesia • 80th percentile for household income: $439/month • 60th percentile for household income: $603/month • There are 38.5m households in Indonesia; 20% x 38.5 = 7.7m • Indonesians spend 80% of disposable income • Annual additional consumer spending in Indonesia: ($603/mo – $439/mo) x 7.7m x 0.8 x 12 = $12.2bn *Poorest investible Asian countries: China, India, Indonesia, Malaysia, Philippines, Thailand Source: Household & Disposable Income data – CLSA September 2009; Population data from China, India, Indonesia, Malaysia, Philippines, and Thailand Government Census websites May 2010. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information.

  20. Emerging Markets Small Cap: Accessing Attractive Themes Example – Indonesia Sources: “Size of Indonesian Middle Class” - World Bank, Standard Chartered Research; “Hypothetical Spending of an Indonesian Urban Household” – Standard Chartered research estimates. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Stocks presented for illustrative purposes only and are not a recommendation to buy or sell the securities listed. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  21. Emerging Markets Small Cap: Accessing Attractive Themes Example – Indonesia *17/20 consumer stocks in the MSCI IMI Index are less than $5bn market cap, with relatively low levels of liquidity. Sources: Standard Chartered, Euromonitor, World Bank, National Bureau of Statistics, Bank of Indonesia; FactSet, MSCI. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. Stocks presented for illustrative purposes only and are not a recommendation to buy or sell the securities listed. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  22. Emerging Markets Small Cap: Long Term Structural Trend Rising Water Demand in China Accessible through Small Cap • China’s 12th Five Year Plan is targeting strong investment in the sector along with stringent environmental codes • Sizable investment in urban & industrial wastewater to increase availability • Emerging Small Cap a direct way to play this compelling, long term theme in a highly fragmented industry Source: Deutsche Bank, World Bank. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  23. Emerging Markets Small Cap: Long Term Structural Trend Rising Water Demand in China Accessible through Small Cap *As of 7/31/12; FactSet; Sources: “Declining Water Resources Per Capita”: Deutsche Bank, WIND; “Rising Water Demand Per Capita”: Deutsche Bank, CEIC. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. This information is being provided at your request and is illustrative only. Past performance does not guarantee future results. Certain securities may not remain in the portfolio at the time that you receive this report. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market condition. A full list of holdings is available upon request. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  24. Asset Class Still Immature – The Opportunity Awaits

  25. Emerging Markets Small Cap: Relative Return Trends As of June 30, 2012 MSCI EAFE vs. MSCI EAFE Small Cap Indexed Return: 1/31/01 – 6/30/12 MSCI Emerging Markets vs. MSCI Emerging Markets Small Cap Indexed Return: 5/31/07 – 6/30/12 Source: FactSet, MSCI. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information.

  26. MSCI Index Liquidity Trends MSCI EM, MSCI EM Small Cap, MSCI Frontier Markets Source: Citi, MSCI. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

  27. Disclosure This publication or any portion thereof may not be copied or distributed without prior written approval from The Boston Company Asset Management, LLC (TBCAM). Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security. Any statements of opinion constitute only current opinions of TBCAM, which are subject to change and which TBCAM does not undertake to update. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. 3578

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