Integrating Emerging Market Equities into a Global Portfolio

1. Integrating Emerging Market Equities into a Global Portfolio September 10, 2007 Steven A. Schoenfeld Chief Investment Officer – Global Quantitative Management

2. Presentation Overview • The Dynamic Global Investment Landscape • Globalization and the Imperative to Evolve Asset Allocation • Proliferation of Investment Choices • Emerging Markets – An Evolving Asset Class • Implementing an Emerging Markets Strategy – Index “versus” Active management • Conclusions

3. I. The Dynamic Global Investment Landscape

4. Investing in a Dynamic Investment Landscape The World has changed dramatically since the early 1990s… • Relative size of the US market has shrunk, despite a robust American economy and stock market • Dollar has steadily weakened; further increasing importance of international diversification • Sustained rise of Emerging Market equities and developing economies • Growing acceptance of “Alternatives”… (despite much confusion about what they are!) • Increased availability of index-based exposure for most investable asset classes • Ability to separate Beta and Alpha, and the portfolio efficiency of doing so

5. Globalization and the Imperative to Evolve Asset Allocation U.S. Equities – @ $16 Trillion Total Market Cap • From incomplete approach to total market exposure • Large / Mid / Small Capitalization Exposure • Seamless Style Exposure How the world of equities has changed… Large Cap (S&P 500, Russell 1000, etc) 71% Mid Cap (S&P 400, Russell 1000, etc) 20% Small Cap (S&P 600, Russell 2000, DJW 5000) 9% Source: Morningstar, 12/30/06

6. Globalization and the Imperative to Evolve Asset Allocation International Equities– @ $19 Trillion Total Market Cap • From developed markets only, (and the dominance of ‘EAFE’) to developed plus emerging markets, to ‘total international’ • Still not ‘complete’ or ‘seamless’ • Benefits of a ‘total international approach’ How the world of equities has changed… Non-US Market Capitalization by Region Bombardier Research in Motion (RIM) TD Bank Nortel Canada 5% Isuzu SNECMA Burberry Celanese Developed Non-North America 70% Other 30% Small Cap 12% Samsung CNOOC Hyundai TEVA Embraer Haier CEMEX SABMiller Emerging Markets 13% Source: NTGI, S&P, MSCI, FTSE; January 2007

7. Globalization and the Imperative to Evolve Asset Allocation • Demographics – major share of the world population outside the U.S. • Share of World GDP and Economic Growth • The United States (in PPP terms) only represents 20% of World GDP Why International exposure is important… Source: NTGI, World Bank, IMF, July 2006

8. B. Proliferation of Investment Choices– Asset Classes and Strategies Equities – Expansion of the Traditional Framework US Equities International Equities ThenNow Large Cap (S&P 500) Large Cap Small Cap (Russell 2000)Mid Cap Small Cap DJW 5000 Russell 2000 ThenNow Developed Large / Mid Developed Large / Mid (MSCI EAFE) Emerging Markets International Small Cap MSCI ACWI x US FTSE Global All Cap S&P Global BMI DJW Global Russell Global

9. II. Emerging Markets – An Evolving Asset Class

10. A Maturing Asset Class Since the late 1990s, there have been substantial micro and macroeconomic advances… • Structural reforms in emerging markets have provided a more stable investing environment • Foreign exchange-denominated debt reduction from 90% of GDP to 10% (EM aggregate) • Improved fiscal balances to a slight deficit of 0.3% of GDP last year for all emerging markets • Greater transparency at both the government and corporate level as emerging market countries move to US GAAP or European IAC standards • Big improvements in “Big Emerging Markets” • Reduced systemic risk • Sovereign ratings upgrades, e.g. : Mexico, Brazil, Korea, China, India • Minimized “contagion effect” • Diversification benefit of Emerging Markets remain, despite higher correlations with developed markets

11. Relative P/E Emerging Markets P/E Relative to Developed World P/E Source: Credit Suisse, MSCI, June 2006

12. Why Emerging Markets? – Long-Term Performance • The Emerging Markets index (MSCI) has greatly outperformed: • Developed International markets (as measured by MSCI EAFE Index) • US equities (as measured by the S&P 500) • From December 2001 to June 2007, Emerging Markets rose by234% • S&P 500 rose 31% • EAFE rose 96% Source: NTGI, MSCI, Standard & Poor’s, June 2007

13. III. Implementing an Emerging Market Strategy Index “versus” Active management

14. Why Use Index Funds in Less Efficient Asset Classes? • “Being There” – Ensure allocation consistent with strategic policy • “Being There” – Efficient way to achieve asset and style diversification • “Allocation explains 95.6% of variability” (Brinson, Beebower & Hood, 1995) • “Including style, allocation explains 95% of variability “ (Sharpe, 1988) • Cost effective (at least 1% cheaper than active emerging markets strategies) • Commissions • Bid/ask spreads • Management fees • Custody costs • Securities lending • Difficult to consistently select outperforming managers • “Arithmetic of Active Management” (Sharpe, 1991) • Survivorship bias

15. Risk Return Characteristics The benefit of EM Equity Beta Source: NTGI, Callan Associates

16. Challenges for Active Emerging Market Managers • Transaction costs and high turnover are deadweightcosts for active managers to overcome • Commissions • Bid-ask spread • Market impact • Benchmark methodology improvement • Fewer outlier opportunities outside the benchmark as indexes have evolved to reflect changes in asset class • Growth of assets under management • Propensity toward more benchmark ‘sensitivity’ • Capacity Constraints • Managers protect existing performance by closing funds to additional investors • Increasingly difficult and costly to invest new assets without market impact • Improved data/information quality • Information advantage has eroded Why pay 100 bps or more in management fees when indexing can provide exposure at a much lower cost?

17. Higher dispersion of returns = diminished alpha opportunity • Dispersion of returns much higher than domestic equities and developed international large cap • Survivorship bias • Landscape and drivers of performance have changed significantly in the last ten years • Many new managers in asset class, as well as global and developed-international “dabblers” • Precision with manager performance universes is warranted • Relevance of averages and median ranking versus asset weighted universes

18. How is the aggregate of Active EM assets performing? Source: S&P Index Versus Active, MSCI; December 31, 2006

19. What Matters Most? Factors to consider when incorporating Emerging Markets into a global portfolio… • Efficient Beta – How do you achieve it? • Index “vs.” Active in Emerging Markets • Is there a role for both? • Do the management fees for active management erode the beta – and alpha? Are you paying too much for beta exposure? • Does the limited capacity of top managers diminish the value of historical peer universes? • The importance of “being there” – Allocation

20. EM Hedge Fund Long / short or market neutral Regional Strategies Traditional active stock selection Structured / country selection Style Tilt (e.g.– “Deep Value”) Private Equity Indexing Can Complement Other Emerging Market Strategies The overriding importance of “being there” Core Emerging Market Index Strategy

21. The Case for “Indexing at the Core” “Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs.” -William F. Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal, 1991. • Application of risk budgeting and precise performance attribution • The ‘Active vs. Index’ debate should be over

22. NTGI Investment Solutions • Emerging Market equity strategies • “Integrated International” and “Total International” equity strategies • Tax-Advantaged Equity (TAE) capabilities for international exposure

23. IV. Conclusions

24. Conclusions • Emerging Markets remain a compelling asset class. • Core exposure is warranted • The index “vs.” active debate should be over – even in emerging markets. • Index-based exposure is efficient exposure • Sophisticated investors can use a blend of index and higher-risk active strategies to custom tailor their risk exposure. • Use of a core “broader and deeper” international / global benchmark might solve both capacity and asset class evolution issues.