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  • The opinions expressed in this presentation are those of the speaker. The International Foundation disclaims responsibility for views expressed and statements made by the program speakers.

    Frontier and Emerging Markets

    James E. Meketa Managing Principal, Chairman Meketa Investment Group, Inc. Westwood, Massachusetts

    I13-1

  • • What are emerging and frontier markets? • How do these markets differ from

    developed markets? • What risks should trustees consider? • Which investment approach is better:

    active or passive? • What about private equity and debt?

    I13-2

  • Global Markets

    • Developed • Emerging • Frontier

    I13-3

  • Developed Markets

    Population GDP

    North America (U.S. and Canada)

    350M $19T

    Europe 500M $18T

    Japan 127M $5T

    Australia 24M $2T

    I13-4

  • Characteristics of Developed Markets

    • Stable governments • Efficient and transparent financial

    institutions • Currencies managed by strong central

    banks • High but stagnant per capita incomes

    I13-5

  • Characteristics of Developed Markets

    • Open to foreign ownership and investment • Ease of capital movement • High rates of consumption vs. production

    I13-6

  • Global Significance of Developed Markets

    • Population 14% • Share of Global GDP 50%

    I13-7

  • 50% of All Global Wealth Creation Takes Place in

    Emerging and Frontier Markets

    I13-8

  • Emerging Markets (the Big Four)

    Population GDP

    China 1,300M $11T

    India 1,300M $2T

    Brazil 200M $2T

    Russia 142M $2T

    I13-9

  • Other Emerging Market Countries

    Mexico Peru

    Indonesia Nigeria

    Turkey South Africa

    Saudi Arabia

    South Korea

    Malaysia

    I13-10

  • Characteristics of Emerging Markets

    • High rates of income growth (many now middle-class)

    • Unstable governments • High levels of corruption, little

    transparency • Volatile currencies managed by weak

    central banks

    I13-11

  • Characteristics of Emerging Markets

    • Emphasis on production and exports over consumption

    • Open to foreign ownership and investment (sometimes)

    • Capital movement may be difficult or impossible

    I13-12

  • Growth of Emerging Markets

    2000 37% global GDP

    2016 50% global GDP

    I13-13

  • Benefits of Diversification

    Developed Markets Emerging Markets Stability High Growth/Returns Safety High Growth/Returns

    Liquidity High Growth/Returns Innovation High Growth/Returns

    I13-14

  • Expected Returns

    2016-2036 U.S. Equities 7.8% Developed Market Equities 8.1% Emerging Market Equities 10.5%

    I13-15

  • Why Are Emerging Market Expected Returns so

    Much Higher?

    • Demographics • Global connectedness • Free technology transfers

    I13-16

  • Demographics

    • A full generation younger • Starting families and businesses • Little debt overhang • Extremely optimistic

    I13-17

  • Connectedness

    • China 1943 • Mongolia 2011 • Argentina 2015

    I13-18

  • Free Technology Transfers

    • iPhones • Advanced jet air craft • Antibiotics • International banking system • Easy access to capital

    I13-19

  • Emerging Global Middle Class

    China 1,300 million India 1,300 million Brazil 200 million Vietnam 90 million Indonesia 250 million Turkey 75 million South Korea 50 million

    Between 2 Billion and 2.5 Billion are Middle Class

    I13-20

  • Emerging Global Middle Class

    • Pets • Braces • Clean public toilets • Local tourists

    I13-21

  • What Do They Look Like?

    I13-22

  • Lima, Peru 1989 Shining Path Guerillas

    Lima, Peru 2012

    I13-23

  • Mongolia 1989 Communist Dictatorship

    Mongolia 2011

    I13-24

  • What Are Frontier Markets?

    Places you might not want to visit as a tourist • The Stans • Bangladesh • Senegal • Argentina

    But also: • Vietnam • Bulgaria

    I13-25

  • Frontier Markets

    • Exciting to visit • Virtually impossible to invest

    I13-26

  • What Risks Should Trustees Consider?

    I13-27

  • Active or Passive?

    • Large Allocations: Active • Small Diversification Allocation: Passive

    I13-28

  • Public Market Funds

    • 235 emerging equity funds = $870 billion • 65 emerging debt funds = $280 billion • 20 frontier (equity and debt) funds =

    $4 billion

    I13-29

  • What About Private Equity and Debt?

    I13-30

  • Private Market Funds

    • 250 private equity funds in emerging (with some frontier)

    • Approx. 15% of all private equity funds raised

    • Concentrated in BRICs – Brazil, Russia, India, China

    I13-31

  • Frontier Private Market Funds

    • 75-100 total general partners • Perhaps 5% of all non-developed funds • $ amount rising rapidly

    I13-32

  • 62nd Annual Employee Benefits Conference November 13-16, 2016 Orlando, Florida

    Session #I13

    Frontier and Emerging Markets

    • 50% of all new wealth will come from emerging and frontier markets

    • Conditions in emerging markets are improving rapidly

    • Many investment vehicles exist

    I13-33

  • 2017 Educational Programs Investments

    63rd Annual Employee Benefits Conference October 22-25, 2017 Las Vegas, Nevada www.ifebp.org/usannual

    Investments Institute March 13-15, 2017 Phoenix, Arizona www.ifebp.org/investments

    Portfolio Concepts and Management May 1-4, 2017 Philadelphia, Pennsylvania www.ifebp.org/wharton

    Related Reading Visit one of the on-site Bookstore locations or see www.ifebp.org/bookstore for more books.

    The Tools & Techniques of Investment Planning, 3rd Edition Item #9029 www.ifebp.org/books.asp?9029

    816

    I13-34

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