Strategic Asset Allocation

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Strategic Asset Allocation

• The Case for Global
• Capital Markets

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Contact Information

• Robert A. Clark, Ph.D., CFA
• Schroeder Family Dean
• School of Business Administration
• Vice President for Strategic Initiatives
• University of Evansville
• 1800 Lincoln Ave.
• Evansville, IN 47722
• Telephone [phone]
• E-mail rc60_at_evansville.edu

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Tools to become Better Advisers
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Global Opportunities/Challenges

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Indian markets strong despite terror attacksBy
Ilya Garger, MarketWatchLast Update 711 AM ET
Jul 12, 2006

• BANGKOK (MarketWatch) -- Indian stocks advanced
  on Wednesday as investors focused more on
  better-than-forecast earnings from technology
  giant Infosys Technologies than a wave of terror
  attacks in Mumbai, India's financial capital.
• The benchmark Sensex index, which tracks 30
  issues on the Bombay Stock Exchange gained 2.97
  to close at 10,930.09.
• Infosys (INFZF INFOSYS TECHNOLOGIES LTD SHS
• INFZF0.00, 0.00, 0.0) , India's second-largest
  software firm, reported that net profit in the
  April-June quarter rose 50 on the year to 8
  billion rupees (173 million), beating analysts'
  consensus forecast of 7.21 billion rupees. Shares
  of Infosys rose 7.48.
• Financial markets showed resilience to the terror
  attacks. As many as 190 people were killed and
  more than 300 injured after eight explosions hit
  the city's commuter rail network during Tuesday's
  evening rush hour. See full story.
• And most observers don't expect the bombing to
  hinder markets over the long-term

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Major Challenge to 21st Investing Understanding
the Transformations in Global Business
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Understanding the Challenge
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Worlds Financial Assets

• 118 trillion
• (and growing)!
• (including bank deposits, government debt
  securities and corporate-debt securities, and
  equity securities)
• (Year end 2003. Versus 53 trillion in 1993,
  and 12 trillion in 1980)

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Financial Assets

• Shift away from banks and toward market
  institutions as the primary financial
  intermediaries.
• 1980 banks represented 45 percent of financial
  assets, by 2003 they represented only 30 percent.
  

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World Markets

• US 44 trillion dominated by private debt
  and equity.
• Europe Banks play a larger role in finance.
• Asia Financial markets are relatively
  isolated from one another and differ within
  the region.

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Financial Market Trends

• Corporate debt is expanding in both the United
  States and Europe.
• Japan growth comes from a huge expansion of
  public debt.
• China and Eastern Europe all asset classes are
  growing quickly.

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Educational Gains

• 1990 2003
• Ghana Adult Lit 58.5 73.8
• Ethiopia Primary 31.8 66.0
• Thailand Secondary 30.8 81.4
• Chile Tertiary 21.3 42.4
• Kuwait Primary 60.2 93.6
• Secondary 42.9 89.3
• Tertiary 12.1 20.9
• World Bank (Ed Stats)

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Developing Nations Now Constitute

• 40 of the Worlds 50 largest Economies
• 50 of the 50 Fastest Growing Economies
• 70 of the 20 Fast Growing in Industrial Output
• 5.5 Annual Growth in Higher Education Grads vs.
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• 20 of the 50 Largest RD Investors

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International Diversification

• The goal of international diversification is to
  benefit from the less-than-perfect correlation
  among various stock markets by forming a
  portfolio among various stock markets by forming
  a portfolio that has lower risk than an otherwise
  well-diversified portfolio of domestic stocks.

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Foreign Stock Funds

• Note The average diversified international fund
  holds more than 10 of its assets in emerging
  markets names at the end of 2001, a bit less in
  2002, and a bit more over the next four years.

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Diversification - Correlations

• Transitions over Time Greater Integration of
  Global Markets.
• Egypt South Africa Zimbabwe
• 1992-1997 0.00 0.13 0.07
• 1998-2003 0.26 0.45 -0.07
• ME Africa
• 1998-2003 0.52

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A Global View
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Compound Annual Growth rate 1993-2003

• United States 8.6
• Europe (Euro-Zone) 9.8
• United Kingdom 11.3
• Eastern Europe 19.3
• Japan 4.0
• China 14.5
• India 11.9
• Source MGI Global Financial Stock database

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Performance

• 1975-1995 1.00 invested
• Africa 0.84
• SP 500 13.14
• Composite emerging markets 10.01

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2004 Emerging Market Winners

1. Ukraine 170.33
2. Slovak Republic 126.91
3. Columbia 126.20
4. Jamaica 115.21
5. Egypt 114.00
6. Bangladesh 107.61
7. Romania 100.08
8. Hungary 96.01
9. Estonia 91.52
10. Saudi Arabia 90.04

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2005 Emerging Market Winners

1. Egypt 160.60
2. Jordan 120.00
3. Saudi Arabia 115.10
4. Columbia 113.50
5. Lebanon 111.78
6. Russia 85.70
7. Pakistan 66.00
8. Kenya 65.38
9. Korea 62.60
10. Romania 61.09

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2005 Regions

• Latin America 50.20
• Asia 25.70
• EMEA 65.30
• Europe 67.00
• E.Europe 68.40
• ME Africa 64.40
• SP/IFCG Indices Total Return through December
  2005

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Understanding the MAZE!
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Country Risk Analysis

• Even though sectors may be more important than
  they were 10 years ago, countries have not
  evaporated as a significant explanatory element
  of multi-country portfolio returns.

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Country Risk Factors

• Political Risk
• Economic Performance
• Debt Indicators
• Debt in Default or Rescheduled
• Credit Ratings
• Access to Bank Finance
• Access to short-term Finance
• Access to Capital Markets
• Forfaiting

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Country vs. Sector Analysis

• Current research indicates that sector analysis
  dominates country analysis in selecting
  investment options.

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Allocation Issues

• DECOMPOSITION of returns in terms of factor
  decomposition indicates that the country factor
  has declined in importance and the sector factor
  has increased in importance.
• Countries used to be the predominant explainer of
  returns, and sectors were relatively less
  important.

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International Accounting Standards

• Accepting a valuation orientation to investment
  selection as investors search for emerging market
  opportunities the quality of accounting
  information is critical.

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Emerging-Markets Funds

• Overall, theyve posted a 24 annualized gain
  over the 2002-2004 period, which is better than
  all other types of mutual funds.
• Note They plunged 46 between October 1, 1997
  and September 30, 1998, due to local currency and
  other problems.

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Fixed Income Investments-2004

• Average return for Emerging-markets bond funds
  for 2004 10
• Bond-rating agencies have been upbeat concerning
  Russia, as that country has aggressively paid
  down debt. High oil and commodity prices have
  helped producers such as Russia, Brazil, and
  Venezuela. Meanwhile, Turkeys improving public
  finances have also have also encouraged
  investors, as that country has strengthened its
  bid for European Union membership.

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Fixed Income - 2005

• According to Morningstar Inc., returns on bonds
  that invest largely outside of the U.S. ranked as
  the second worst investments in 2005 with a -3.2
  return.
• Emerging market bond funds hit record highs in
  2005 returning 12 on average.
• The dollar rose almost 14.6 against the euro
  and 15.2 against the yen in 2005.

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Fixed Income Investments

• Sixth consecutive year of double-digit returns.
• Since the start of the emerging-markets bond
  rally in 1999, this categorys average annual
  return of 15 Tops those of virtually all fixed
  income and equity categories.

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Emerging Markets Bond Average

• 2004 YTD () 10.65
• 3-Year Return () 17.51
• 5-Year Return () 15.22
• Expense Ratio () 1.00
• Source Morningstar (accessed 2/18/2005)

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Global Diversification

• If investors are concerned about the classic
  definition of risk-the volatility of a portfolio
  they can reduce risk by holding more bonds, not
  by changing the composition of their equity
  allocations.

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Emerging Markets

• Transparency
• Legal and Regulatory Framework
• Liquidity
• Transparency
• ..Increasingly Integrated!

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• Questions?

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Conclusion..
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Whatever their Objective.
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Investment Strategic Review