Next 11 Emerging Markets Fund
Fund presentation
APRIL 2011
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What is this fund? – Next 11 Emerging Markets Fund, based on an original idea by Goldman Sachs in
2005
Reasons why? – Countries with low levels of debt to GDP should outperform countries with high levels of
debt to GDP
Why we believe you should own this fund – Experienced management team, improved efficient frontier
curve
Why we believe this asset class will outperform over the next 10 years – debt to GDP discussion,
rising consumer class leading to possible re-rating
Addendum
Source: Castlestone Management
Next 11 Emerging Markets
Presentation Overview
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Source: *Goldman Sachs Global Economics Papers – GS Global Economic Website.
Creation of the N-11 concept and its evolution
2001
Goldman Sachs coins the term „BRIC‟
2005
Goldman Sachs introduced the concept of Next 11
2007
Next 11 becomes more than an acronym – increased focus on these countries
2010
Castlestone launches the Next 11 fund
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Source: Goldman Sachs & Castlestone Management
Mexico
Nigeria
Turkey
Egypt
Iran
Pakistan
Bangladesh
Indonesia
Vietnam
Philippines
Korea
What are the Next 11 Emerging Markets?
Geographically Diversified
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Source: *2009 IMF, 1999 nation master. ** The Economist Pocket World Figures 2010.
Note: Past performance cannot be relied on as a guide to future performance.
0 50 100 150 200 250
Bangladesh
Egypt
Indonesia
Iran
Mexico
Nigeria
Pakistan
Philippines
South Korea
Turkey
Vietnam Population in Millions** 86.4
75.2
48.1
85.9
164.6
137.2
109.6
71.2
228.1
76.9
147.1
Population**
The driving factor
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Source: *2009 IMF, 1999 nation master. ** The Economist Pocket World Figures 2010.
Note: Past performance cannot be relied on as a guide to future performance.
GDP per capita*
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000
Bangladesh
Egypt
Indonesia
Iran
Mexico
Nigeria
Pakistan
Philippines
South Korea
Turkey
Vietnam
2009*
1999*
+695%
+350%
+193%
+244%
+470%
+686%
+174%
+570%
+505%
+346%
+306%
Rising consumer class
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The Fund
The fund is a long only Next 11 fund with actively managed exposure to Next 11 emerging market equities.*
This fund will not invest directly in Iran, but may obtain indirect exposure to the country via stock picking
FSA recognised and approved for distribution in the UK
Available in $USD, €EUR and £GBP
€ EUR and £ GBP shares hedged against $ USD
Next 11 Emerging Markets
* The fund may also invest in linked indices, ETFs and third party funds
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The Objective
The primary investment objective is to provide positive returns in a variety of market conditions by investing
in the Next 11 countries ex Iran.
The Strategy
The Next 11 Emerging Markets Fund can invest across equities linked to the economic development of the
Next 11 emerging markets.
Next 11 Emerging Markets
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Reasons why?
The concept was introduced by Goldman Sachs in 2005 in a similar way that Goldman Sachs
introduced BRIC in 2001
─ The concept was based on determining countries with large populations that will
challenge the G7 countries by 2050
Geographic diversification
─ Next 11 countries comprise less than 20% of the MSCI Emerging Markets Index
─ Next 11 countries are less economically and politically „interlinked‟ unlike the BRIC
countries where China is dominant both economically and politically
─ Each country is predominantly domestically driven and therefore less affected by another
N11 country – consider the image of a „string of pearls‟
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If a re-rating of the N11 markets were to occur, as it did with BRIC, the Next 11 Emerging Market
Fund should significantly outperform GEM funds over the next decade
Reasons why?
Next 11 Emerging Markets enhances your Emerging Markets portfolio return
Source: *Bloomberg & Castlestone Management.
2001 – 2011* BRIC outperformed GEMs by 3.4% pa
2001 – 2011* GEMs outperformed S&P by 15% pa
2001 – 2011* Next 11 outperformed S&P by 21% pa
2001 – 2011* Next 11 outperformed BRIC by 2.6% pa
2001 – 2011* Next 11 outperformed GEMS by 6% pa
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Reasons why?
We believe emerging markets will outperform developed markets over the next decade
─ Equity markets in countries with low levels of debt to GDP should outperform those with high levels of debt
to GDP due to potential re-rating of equity p/e multiples:
Infrastructure investment (roads, rail) leading to improved productivity
Reduced burden of an aging population on medical and pensions systems
Dynamic development of independence, privatisation, rights etc
Better healthcare/education systems with increased population growth
Increased integration with global economies
Higher degrees of corporate governance, regulatory oversight
Source: *Bloomberg & Castlestone Management.
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22% Weighting to
Next 11 would have
resulted in a total
increase in annualised
returns of 88% over
portfolio C and of 12%
over portfolio B, at the
same level of risk
Source: Bloomberg & Castlestone Management. Fixed Income: Merrill Lynch Global Government Bond Index, Equities: S&P 500 Price, Commodities: S&P GSCI TR, Emerging Markets: MSCI Emerging Markets, Next
11: BNP Core 8 Next 11 Index. October 2011 to February 2011.
Improved Portfolio Efficiency A
nn
ua
lis
ed
Retu
rn
Portfolio A: Fixed Income, Equities, Commodities, Emerging Markets and Next 11
Portfolio B: Fixed Income, Equities, Commodities and Emerging Markets
Standard Deviation
Portfolio C: Fixed Income, Equities and Commodities
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
2% 3% 4% 5% 6% 7% 8% 9%
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Next 11 30%
GEM or BRIC 70%
Note: *This is based on Castlestone Management‟s view of Portfolio Planning. This should not be construed as advice. In plann ing your portfolio, please seek professional planning advice.
Emerging Market Equities
Where does this fit in you portfolio*
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Source: *Goldman Sachs ,Bloomberg & Castlestone Management
Note: Past performance cannot be relied on as a guide to future performance.
What are the Next 11 Emerging Markets?
• Infrastructure growth
• Improved healthcare and education
systems
• Increased productivity = less burden
on economy
• By product of this is PRODUCTIVITY
• Increased urbanisation
• More integration with global
economies
• Property ownership
• Development of independence
• Rising consumer class
• Increased GDP per capita
• Further global & domestic
investment
• Improved corporate governance
• Potential P/E multiple expansion
• Outperformance of equity market
in countries with low levels of
debt to GDP
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GEM vs S&P 500 – last decade
Source: Bloomberg & Castlestone Management
0%
100%
200%
300%
400%
500%
600%
Oct 2001 Oct 2002 Oct 2003 Oct 2004 Oct 2005 Oct 2006 Oct 2007 Oct 2008 Oct 2009 Oct 2010
MSCI Emerging Markets Index
S&P 500
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Next 11 vs S&P 500 – last decade
Source: Bloomberg & Castlestone Management
0%
100%
200%
300%
400%
500%
600%
700%
800%
Oct 2001 Oct 2002 Oct 2003 Oct 2004 Oct 2005 Oct 2006 Oct 2007 Oct 2008 Oct 2009 Oct 2010
S&P 500
Next 11 Index
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Source: Bloomberg & Castlestone Management. *Date range: December 31st 2010 to September 29th 2010. **Date range: September 2001 to June 2010. N-11: Next-11 Core 8 Index, BRIC: MSCI BRIC Index,
Emerging Markets: MSCI Emerging Markets Index TR
Note: Past performance cannot be relied on as a guide to future performance.
How have the Next 11 performed
This is your opportunity to achieve ‘BRIC-like returns’ a second time around
Index/Country Annualised Return 2001 – 2010**
N-11 +22%
BRIC +20%
Emerging Markets +16%
S&P 500 +2%
Topix 500 +2%
EUROSTOXX 600 +6%
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Source: Bloomberg & Castlestone Management. As of July 2011. *Indicative, **0% because no ability to invest directly at present
Note: Past performance cannot be relied on as a guide to future performance.
MSCI Emerging Markets Index Next 11 Emerging Markets
(Indicative Weightings)
Index Weightings – Emerging Market diversification*
MSCI Country Next 11
0% Bangladesh 3%
16% Brazil 0%
17% China 0%
1% Egypt 6%
7% India 0%
2% Indonesia 18%
0% Iran 0%**
13% Korea 10%
4% Mexico 28%
0% Nigeria 4%
0% Pakistan 3%
0% Philippines 7%
7% Russia 0%
7% South Africa 0%
11% Taiwan 0%
2% Turkey 17%
0% Vietnam 4%
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Source: Bloomberg & Castlestone Management. *Date range: December 31st 2010 to February 28th 2011 **Date range: September 2001 to June 2010. N-11: Next-11 Core 8 Index, BRIC: MSCI BRIC Index, Emerging
Markets: MSCI Emerging Markets Index TR
Note: Past performance cannot be relied on as a guide to future performance.
Index/Country 2010 2011 YTD*
RTS Standard (Russia) +19.1% +8.22%
MSCI Emerging Markets +16.4% -1.45%
Bombay SE500 (India) +16.4% -9.19%
S&P 500 +12.8% +4.14%
FTSE 100 +9.0% +0.30%
EURO STOXX 600 +8.6% +0.36%
MSCI BRIC +7.3% +0.23%
Bovespa (Brazil) +1.0% -2.56%
Hang Seng China Ent
Index (China - HK) -0.8% +2.23%
Nikkei 225 -3.0% -6.77%
CSI 300 (China - Local) -12.5% +5.31%
Index/Country 2010 2011 YTD*
DSE General (Bangladesh) +82.8% -25.64%
TEPIX (Iran) +68.2% +23.5%
JCI (Indonesia) +46.1% -2.60%
PSEi (Philippines) +37.6% -7.74%
Karachi 100 (Pakistan) +28.1% -3.94%
ISE Nat 100 (Turkey) +24.9% -1.85%
Kopsi (Korea) +21.9% +0.15%
Mexico ICP +20.0% -4.35%
NSE All Share (Nigeria) +18.9% +1.15%
Egypt Hermes +15.7% -27.35%
Ho Chi Minh (Vietnam) -2.0% -5.55%
How have the Next 11 performed in 2010
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Source: Castlestone Management.
Note: Past performance cannot be relied on as a guide to future performance.
Investment perspective – breaking down the Next 11
10%
Leader
65%
Core
20-25%
Frontier
0-5%
Proto
Korea Mexico Egypt Bangladesh
Indonesia Vietnam Iran
Turkey Pakistan
Philippines Nigeria
Wide Range of Investment Profiles
Universe Focused on Core Countries
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Source: Bloomberg & Castlestone Management
Conclusion
The concept was introduced by Goldman Sachs in 2005 as Goldman Sachs introduced BRIC in 2001
– second opportunity to achieve „BRIC-like returns‟
Geographic diversification within emerging markets
– Next 11 is a complement to BRIC
Next 11 Emerging Markets enhances your Emerging Markets portfolio return
We believe emerging market equities will outperform developed market equities over the next
decade
Our belief is that a diversified emerging markets portfolio should include 20 - 30% allocation to Next
11 emerging markets
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Addendum
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Claudio Oliveira
Head of Trading
Claudio joined Castlestone Management in April 2007 to provide fundamental research and trading execution.
Prior to joining Castlestone Management, Claudio worked for Deutsche Bank in New York for four years as an
analyst within the credit risk department. Claudio has a BA in Economics with a minor in Mathematics from
Rutgers University.
Dmitry Zhuk
Emerging Markets Equity Analyst
Dmitry joined Castlestone Management in February 2011 to take the position of an emerging markets equity
analyst. He has a generalist sector focus and is tasked with providing fundamental bottom-up company
research and assisting with top-down macro analysis. Prior to Castlestone, Dmitry spent four years as an equity
research analyst at Citigroup in London where he covered emerging markets Telecom and Media sectors.
Dmitry holds an Honours Masters degree in Economics from the University of Edinburgh, UK.
Fanfan Li
Emerging Markets Trader
Fanfan joined Castlestone in May 2011 as a junior trader. Prior to joining Castlestone, Fanfan worked as a
dealer at London Capital Group for four years gaining experience trading in an array of asset classes as well as
facilitating expansion into Chinese markets. Fanfan received an Honours Masters degree in International
Securities from the University of Reading.
Robert Hunt
Investment Manager
Robert is a director and on the investment committee of a number of BVI public professional and private funds.
Robert joined Castlestone Management in 2006 and has carried out a number of functions across the business,
starting initially in the position as Research Analyst and progressing towards an investment management role.
Prior to this Robert undertook experience as a Portfolio Assistant at Thesis Asset Management Plc during his
university placement year. He received a BA (Hons) in Financial Services from Bournemouth University, UK.
Investment team
Source: Castlestone Management.
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Fundamental
Bottom-up: Buying companies, not tickers or markets - first and foremost fundamental equity analysis
But keen attention to macro for two reasons:
1. Most attractive risk/rewards where there is a bottom-up company, combined with an attractive thematic exposure
2. Avoid companies with very pertinent macro risks that may not be priced in, regardless of other attractive attributes
Long term Investment Horizon
Sector Generalist, but bias away from specialised areas (e.g. Biotech)- benefit of broad global and sector awareness/view, rather
than being pigeonholed to find the best absolute value wherever possible
Not benchmark/tracking error constrained
Contrarian mindset- avoiding “hot stocks”- biggest risk in owning individual equities is a reversal of sentiment towards a name.
Note: This is based on Castlestone Management‟s view of Portfolio Planning. All content is subject to change at the Portfolio Manager‟s discretion.
Investment philosophy
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Focus upon 5:
Unknown
Unloved
Undervalued
Under-researched
Under owned
Above combined with strong attention to valuation- but interpretation includes both „value‟ (i.e. cheap assets) and „GARP‟ (i.e. cheap
growth)
Concentration: circa 30 names
Approach applied consistently throughout all prior employment
Note: This is based on Castlestone Management‟s view of Portfolio Planning. All content is subject to change at the Portfolio Manager‟s discretion.
All apply to Next 11 countries
Investment philosophy
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Long biased philosophy- value is captured through identifying attractive companies as longs
Derivatives used for efficient portfolio management, not value capture- primarily at the index level using futures- absolute return
mindset and incentive structure
Market exposure will vary over time:
1. Primarily to avoid systemic risks at times of volatility- links in with broader Castlestone expertise in Macro analysis
2. Owning a specific company does not require owning the underlying market.
Currencies generally left un-hedged when PM is agnostic - but reviewed especially where country concentration is high
Note: This is based on Castlestone Management‟s view of Portfolio Planning. All content is subject to change at the Portfolio Manager‟s discretion.
Approach to risk management
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Note: This is based on Castlestone Management‟s view of Portfolio Planning. All content is subject to change at the Portfolio Manager‟s discretion.
Quantitative
• Cheap relative or absolute
valuation
• Out of favour with analysts
• Insider buying
• 52 week low
Qualitative
• Respond to newsflow, e.g.
Uncertainty providing market
mispricing
• Inflection points – e.g. Change
in management or incentives
• Attractive outlook?
• Catalyst for change?
• Valuation relative to history /
market / peers?
• Likely to be ~50% upside
• Upside >3x downside
• If not cheap / attractive on
quick and dirty look / valuation
– likely not a buy
• Porters Five Forces
• SWOT
• Competitor analysis
• Management calibre /
incentives
• Risk assessment
• Market capitalisation
• Average daily value traded
• Decide weighting
• How to fund purchase
• Risk management: hedge
currencies or business
exposure
• Buy?
• Not a buy?
• Absolute
• Relative
• Potential downside
• Margin of safety?
Traders handle execution short-
term variance from PM indicated
weightings allowed based on
market movements, available
flows
• Review on news flow
• Set price alert to review
decision regardless of no news
• Ongoing monitoring
• Continual rebalancing
Quant / Qual Screens Fundamental / Valuation
Snapshot Rigorous Analysis Universe Demarcation
Portfolio Construction Decision Valuation Execution
Watchlist Portfolio Management
Investment process
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Corporate Overview
Independently owned asset manager that providing investment management services based on foresight,
appropriateness and with the aim of meeting long term investment objectives of its investors
Founded in 1996 by Angus Murray, a former President of Macquarie Bank USA Inc. and Co-Head of the
International Equity Department of NatWest Markets USA
55 employees , 9 investment professionals – 4 commodity focused, 3 emerging markets focused
Over 400 partners around the world who understand and allocate to our funds; available via major life platforms
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“Index Constituent”
Aliquot Gold Bullion
March 2011
Source: Castlestone Management. Note: Morningstar rating refers to Aliquot Gold Bullion class A,C & Aliquot Precious Metals class D only. © [2010] Morningstar UK Limited. Overall rating as at 31/08/2010. All Rights
Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, completely or timely. Neither
Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Fund Focus & Awards
COMMODITIES EMERGING
MARKETS
GLOBAL
MACRO
“Best International Sales Team”
Castlestone Management
Highly Commended May 2008
“Best Performing Global Macro Fund”
Porcupine Global Macro Plus
Finalist November 2007 & 2009
“European Performance Award”
Porcupine Global Macro Plus
Highly Commended May 2009
“Index Constituent”
Aliquot Gold Bullion
October 2009
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Note: Shares in Castlestone Management funds may not be offered or sold directly or indirectly in the United States nor may be held for the account or benefit of any U.S. person as defined in regulation S under the
United States securities act of 1933 (as amended). Any reoffer or resale of any such shares in the United States or to U.S. persons may constitute a violation of U.S. law. *Representative offices.
Global Reach
London, UK Investment Team
Legal & Compliance
Marketing
Sales
New York, USA
Latin America* South Africa
Europe*
Hong Kong
Singapore
Dubai*
Offices & representation in strategic locations across five continents
British Virgin Islands Fund Manager: BVI Funds
Investment Team
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Important information
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transaction documents. Castlestone Management (“We”) will not be liable for any use you make of any information in this document. We are not your advisor or
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not responsible for information stated to be obtained or derived from third party sources. All opinions are given as of the date hereof and are subject to change. We
are not obliged to inform you of any such changes.
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fluctuate and investors may not recoup the amount originally invested. Any forward-looking statements concerning the financial condition, results of operations and
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violation of United States securities law. This is not exhaustive; other regional-specific wording may apply. If in doubt, please consult with Castlestone
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April 2011: 21/04/11