emerging markets: opportunities and challenges in public equity investing
TRANSCRIPT
Knowledge. Experience. Integrity.
CALLAN INVESTMENTS INSTITUTE
Research
April 2016
Emerging Markets
Opportunities and Challenges in Public Equity Investing
The last few years have been challenging for emerging market equities. In 2015, the MSCI Emerging
Markets Index declined 14.9% and underperformed developed markets for the third straight year, dragged
down by weak commodity prices, the slowing global economy, and the U.S. Fed interest rate hike in
December. Looking ahead, Callan’s 2016 capital market projections forecast a 10-year outlook for emerg-
ing market equities of 7.6% annualized return and a sizable 27.9% risk (standard deviation).
We assembled a group of Callan’s experts to discuss this challenging yet exciting asset class, of which it
might be said, “When it was good, it was very, very good, and when it was bad it was horrid.” Our experts
included Ho Hwang, Andy Iseri, and Lyman Jung of our Global Manager Research group. (Their full biog-
raphies can be found at the end of the paper.)
Ho HwangVice President, Global Manager Research
Andy Iseri, CFASenior Vice President, Global Manager Research
Lyman JungVice President, Global Manager Research
2
Are emerging markets a safe place to invest? What are the associated risks?
Andy Iseri Statistically,emergingmarkets(definedbyMSCI)experiencehighervolatilitythandevelopedmarkets,
as seen in Exhibit 1. Coupled with relatively high correlation to other equity markets, an allocation to
emerging markets typically leads to heightened volatility for the overall equity structure.
Thereareothersignificantrisks,includingnaturalresourcepricedeclines,theslowdowninChina,cur-
rencyrisk,risinginterestrates,andnon-financialrisks.(Pleasesee“Section1:DetailedDiscussionof
Emerging Market Risks” in the Appendix for a deeper dive into these various risks.) However, emerging
marketequitiesstillplayanimportantroleinwell-diversifiedinstitutionalportfolios.
Sources: MSCI, Callan PEP
2015 Emerging Markets Performance CommentaryIn 2015, the appreciation of the U.S. dollar materially impacted performance on the U.S. dollar-de-
nominated MSCI Emerging Markets Index. Many currencies declined by double digits on a percent-
age basis against the U.S. dollar amid global growth concerns. The local currency version for the
MSCI Emerging Markets Index was down 5.8% in 2015 (compared to -14.6% for the U.S. dollar
version), so currency alone cost the Index nearly 900 basis points. All sectors declined in the asset
class, led by Materials (-21.6%), Utilities (-20.8%), and Telecom (-19.6%). The best performing sec-
tor was Health Care at a dismal -5.2%. From a style and market cap perspective, growth outper-
formed value stocks by more than 700 basis points, and small cap bettered mid/large cap stocks by
800 basis points for the year.—Lyman Jung
0%
10%
20%
30%
40%
13.2 – MSCI Emerging Market
9.7 – MSCI World
91 07 08 09 10 11 12 13 14 15989796959493 9992 06050403020100
Exhibit 1
Rolling 12 Quarter
Standard Deviation
for 25 Years ended
December 31, 2015
3Knowledge. Experience. Integrity.
China• Fell 8% as the central government’s pursuit of the anti-corruption
campaign continued • TheCentralBankcuttheinterestratefivetimesandannounceda
surprise devaluation of the renminbi
Hungary• Best-performing emerging market (+36%); boosted by Prime
Minister Victor Orban’s economic reforms• Improving economic prospects and a potential return to invest-
ment grade debt rating helped gains
Russia• Among the few bright spots, Russia was one of only two emerging
market countries that was positive, up 4% for the year• The ruble fell 20% against the U.S. dollar, so the rally was much
less impressive in U.S. currency• Russian stocks rebounded after steep losses in 2014, helped by thecentralbankcuttingtheinterestratefivetimesin2015
Indonesia• Declined by more than 19% as growth slowed despite the govern-
ment’s economic stimulus plan • Rupiah fell 10% against the U.S. dollar
Brazil• Equities were down more than 41% as the economy plunged into
recession• Hamperedbyhighinflation,highunemployment,lowcommodity
prices, and political uncertainty amid continued fallout from the Petrobras investigation
Turkey• Down32%despitebenefitingfromloweroilprices• Lira fell 20% against the U.S. dollar
2015 Emerging Market Highlights
Greece
• Worst-performing emerging market (-61%) as the country’s debt crisis continued
• Its potential withdrawal from the euro zone and continued auster-ity measures hampered returns
India• Fell 6% in dollar terms as the excitement over reforms and eco-
nomic improvements waned over the year• Currency was also a headwind as it fell 5% against the U.S. dollar
4
Callan Periodic Table of Investment Returns: Emerging Markets
Are we truly tapping into emerging market growth by investing in indices? What are your thoughts on alternative emerging market products?
Ho Hwang Investments in emerging markets continue to enable investors to capitalize on the growing economies
within developing markets. According to MSCI economic exposure data, the MSCI Emerging Markets
Index has consistently derived approximately 80% of its revenues from emerging markets over the past
fiveyears.(See“SectionII:ADeeperDiveIntotheMSCIEmergingMarketsIndex”intheAppendix for
a detailed discussion of this Index.) Two breeds of products centered on emerging market consumption
areslowlybubblingup:directandindirectemergingmarketconsumerstrategies.Althoughbothproducts
seek to capture the burgeoning emerging market middle class and focus on consumer-related sectors,
they have differentiated investable universes.
Sources: Callan, The FTSE Group, MSCI, Russell
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
FTSE Emerging
SC
34.8%
FTSE Emerging
SC
53.8%
Russell 3000
-37.3%
FTSE Emerging
SC
117.2%
Russell Emerging Mkts SC
28.1%
Russell 3000
1.0%
FTSE Emerging
SC
25.2%
Russell 3000
33.6%
Russell 3000
12.6%
Russell 3000
0.5%
Callan Emerging Mkt Style
34.3%
Russell Emerging Mkts SC
43.9%
MSCI World ex US
-43.6%
MSCI Emerging Mkts SC
113.8%
MSCI Emerging Mkts SC
27.2%
MSCI World ex US
-12.2%
Russell Emerging Mkts SC
24.2%
MSCI World ex US
21.0%
FTSE Emerging
1.6%
MSCI World ex US
-3.0%
Russell Emerging Mkts SC
33.7%
MSCI Emerging Mkts SC
42.0%
FTSE Emerging
-52.9%
Russell Emerging Mkts SC
96.6%
FTSE Emerging
SC
25.8%
MSCI Emerging Markets
-18.4%
MSCI Emerging Mkts SC
22.2%
Russell Emerging Mkts SC
5.3%
FTSE Emerging
SC
1.5%
MSCI Emerging Mkts SC
-6.8%
Russell Emerging Markets
33.4%
Russell Emerging Markets
40.9%
Callan Emerging Mkt Style
-53.3%
Russell Emerging Markets
83.8%
Russell Emerging Markets
21.7%
Callan Emerging Mkt Style
-18.5%
Callan Emerging Mkt Style
19.6%
FTSE Emerging
SC
2.3%
MSCI Emerging Mkts SC
1.0%
Russell Emerging Mkts SC
-8.9%
FTSE Emerging
33.1%
MSCI Emerging Mkts IMI
39.8%
MSCI Emerging Markets
-53.3%
FTSE Emerging
82.6%
MSCI Emerging Mkts IMI
19.9%
FTSE Emerging
-19.0%
Russell Emerging Markets
18.8%
MSCI Emerging Mkts SC
1.0%
Russell Emerging Mkts SC
-0.3%
FTSE Emerging
SC
-10.5%
MSCI Emerging Mkts SC
33.0%
FTSE Emerging
39.7%
MSCI Emerging Mkts IMI
-53.8%
MSCI Emerging Mkts IMI
82.4%
FTSE Emerging
19.8%
Russell Emerging Markets
-19.4%
MSCI Emerging Mkts IMI
18.7%
Callan Emerging Mkt Style
34.3%
Callan Emerging Mkt Style
-1.1%
Russell Emerging Markets
-12.8%
MSCI Emerging Markets
32.2%
MSCI Emerging Markets
39.4%
Russell Emerging Markets
-55.5%
MSCI Emerging Markets
78.5%
Callan Emerging Mkt Style
19.4%
MSCI Emerging Mkts IMI
-19.5%
MSCI Emerging Markets
18.2%
Russell Emerging Markets
0.0%
Russell Emerging Markets
-1.7%
Callan Emerging Mkt Style
-13.7%
MSCI Emerging Mkts IMI
31.7%
Callan Emerging Mkt Style
39.1%
MSCI Emerging Mkts SC
-58.2%
Callan Emerging Mkt Style
77.3%
MSCI Emerging Markets
18.9%
Russell Emerging Mkts SC
-25.3%
FTSE Emerging
17.9%
MSCI Emerging Mkts IMI
-2.2%
MSCI Emerging Mkts IMI
-1.8%
MSCI Emerging Mkts IMI
-13.9%
MSCI World ex US
25.7%
MSCI World ex US
12.4%
Russell Emerging Mkts SC
-59.5%
MSCI World ex US
33.7%
Russell 3000
16.9%
FTSE Emerging
SC
-27.1%
Russell 3000
16.4%
MSCI Emerging Markets
-2.6%
MSCI Emerging Markets
-2.2%
MSCI Emerging Markets
-14.9%
Russell 3000
15.7%
Russell 3000
5.1%
FTSE Emerging
SC
-63.3%
Russell 3000
28.3%
MSCI World ex US
8.9%
MSCI Emerging Mkts SC
-27.2%
MSCI World ex US
16.4%
FTSE Emerging
3.5%
MSCI World ex US
-4.3%
FTSE Emerging
-15.2%
See page 15 in the
Appendix for the standard
Callan Periodic Table
of Investment Returns,
which may provide useful
additional context.
5Knowledge. Experience. Integrity.
The direct products gravitate to emerging market small cap companies, while the indirect strategies veer to
multi-national, developed market, large cap companies. Both direct and indirect strategies have performed
well (albeit having short track records) and offer beta around 0.80 relative to the MSCI Emerging Markets
Index.Despitethefavorablerisk/returnprofile,theseproductsmaypotentiallyhaveoverlapriskwithother
asset classes given their investable universe and subsequently disrupt the non-U.S. equity structure. As
such, both direct and indirect products may not be ideal for a core allocation, but viable for an opportunistic
mandate.
What about frontier markets?
Ho Hwang Frontier markets—countries with investable stock markets that are less established than those in the
emerging markets—are directly tied to their local economies. They are not a viable option to get indirect
exposure to emerging markets, considering only about 7% of revenues (MSCI Frontier Markets Index)
stem from emerging markets. (See Exhibit 11 in the Appendix.) Frontier markets offer a unique risk/
returnprofileduetotheirlowcorrelationtoothernon-U.S.equities.
Therearetwotypesoffrontiermarketstrategies:pureandhybridproducts.Similartodirectandindirect
emerging market products, pure and hybrid frontier market strategies are differentiated by the investable
universe. The pure products solely focus on frontier markets, whereas the hybrid portfolios utilize both
emerging and frontier markets. Because the hybrid products also invest in emerging markets, they may be
anoptionforinvestorsseekingemergingmarketexposurewithfrontiermarketflexibility.
What are some of the non-financial reasons to invest in emerging markets?
Andy Iseri Weoftendiscuss theeconomicandfinancial rationales foremergingmarket investing.But thereare
somenon-financialconsiderationswheninvestinginemergingmarkets,andperhapsforemostamong
these is the demographical shift taking place in these markets.
The vast majority of the world’s population live in emerging and frontier markets. The world has approxi-
matelysevenbillionhumans:China’spopulationtotalsmorethan1.3billion,India’sisover1.2billion,and
the U.S. has a mere 300 million. If an investor wants exposure to consumers, emerging markets should be
their focus. Not only is the current population tilted to emerging economies, so too is the trend of population
growth. Exhibit 2 shows past and projected population statistics for select countries and regions.
Sources: Richard Hokenson, United Nations
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
50 30 35 40 45 50858075706560 9055 25201510050095
Pop
ulat
ion
(mill
ion)
Brazil China Europe India Russia U.S.
Present day (2016)
Exhibit 2
Past and Projected
Population Statistics
6
This chart depicts the population of least, less and more developed economies by age bracket. As
time marches on and people age, areas with downward-sloping bars will see increases in working-age
populations.
Perhaps more important than total population is the working-age population. Many developed countries
face aging populations. A shrinking workforce relative to a growing retired population spells trouble.
Strong future economic growth requires a growing workforce, and trends favor emerging markets. As
time marches on, populations in these economies are not only larger, but younger. These less-devel-
oped economies will have ample working-aged people for years to come. People in more developed
countries do live longer—although that poses a different set of issues for pension plans.
Is a diversified global emerging market strategy better than local specialists?
Ho Hwang Although country/regional specialists provide local expertise, global emerging market strategies in gen-
eralhavethefollowingdistinctiveadvantages:cost,regionalallocation,cross-countrystockselection,
and risk management. Unlike global emerging market strategies, a structure with local specialists can
be expensive as it requires multiple managers (i.e., Asia, Europe and Middle East, and Latin America)
to gain full emerging market exposure. Further, these local strategies may also have higher vetting and
monitoring costs considering their regional locations. Additionally, a structure with regional managers
underutilizes alpha opportunities from country and regional allocations.
Country and regional performance dispersion is wide within emerging markets (Exhibit 4).Thefive-yearreturn difference between the best-performing country (United Arab Emirates) and the worst-performing
country (Greece) was 46%. Regionally, emerging Asia beat emerging Latin America by roughly 13%.
Global emerging market strategies are better positioned to capture this performance gap relative to local
specialists because regional allocation, stock selection, and risk management processes are holistically
managed to construct optimal portfolios. Conversely, with regional strategies asset owners would be
Exhibit 3
Population of Least,
Less, and More
Developed Economies
by Age
Least Developed Less Developed More DevelopedP
opul
atio
n (m
illio
n)
0
100
200
300
400
500
600
0–4 100+95–9990–9485–8980–8475–7970–7465–6960–6455–5950–5445–4940–4435–3930–3425–2920–2415–910–145–9
Age brackets
Source: World Economic Forum
7Knowledge. Experience. Integrity.
responsible for top-down decisions and execution. To simplify this process, plans may adopt a static
regional allocation. Unfortunately, such a structure would mute alpha opportunity and quite possibly
heighten risk given the country/regional performance dispersion. Moreover, company valuation and risk
assessment across countries and regions are limited with local specialists due to their narrow universe,
which may lead to sub-optimal stock selection and unintended risk exposure. Although we recognize that
country or regional specialists have local insights, top-down considerations have the potential to derail
stock selection.
EM Latin America
-11.4%
-4.8%-0.8%
-14.4%
All EmergingMarkets
EM Europe and Middle East EM Asia
Exhibit 4
Five-Year Regional
Performance
(U.S. Dollars)
Sources: Callan, MSCI
Five-Year Country
PerformanceGreece
Brazil
Colombia
Chile
Peru
Russia
Turkey
Poland
Czech Republic
South Africa
Hungary
All Emerging Markets
Egypt
Indonesia
Malaysia
Mexico
India
Korea
Taiwan
Thailand
China
Qatar
Philippines
United Arab Emirates
-33%
13%
11%
5%
1%
0%
-20%
-14%
-14%
-13%
-12%
-9%
-9%
-8%
-6%
-5%
-5%
-4%
-3%
-3%
-2%
-2%
-2%
-1%
Sources: Callan, MSCI
8
How do you construct an emerging market structure?
Lyman Jung Aswithmostassetclasses,Callanadvocates forabalanceddiversifiedapproachwhenconstructing
an emerging market structure. We believe it is sub-optimal for an overall structure to be exposed to
significantbiasesrelativetotheassumptionsusedinassetallocationstudiesunlessthosebiasesare
intended and supported by sound investment principles. Many factors should be considered, including
overall and component style factors, market capitalization, and sector, country, and currency exposures.
Factors can have different levels of importance in emerging markets relative to developed. For example,
the impact of style (value/growth) is generally less pronounced in emerging markets than in developed
markets or single-country strategies. Country exposure has a heightened effect relative to developed
markets.
Callan also pays close attention to return patterns and performance predictability. For example, an
emerging market manager with a quality growth philosophy may display strong growth characteristics;
however, the manager’s performance pattern exhibits downside protection and as such may be appro-
priate as a standalone manager. Managers in a multi-emerging markets structure should complement
each other as far as style, fundamental vs. quantitative investment processes, and top-down vs. bottom-
up managers, while close attention is paid to their return patterns.
Country or regional specialists can also be utilized, as they may offer specialized local research into
less-covered areas. In this case, plan sponsors would have to manage the allocations to each special-
ist while individual managers would focus on stock selection since they lack the ability for cross-border
investing. Use of specialists will lead to an increased number of managers.
Passive implementation may have a place in the overall non-U.S. equity structure—perhaps in a core/
satellite approach where the passive sleeve is the structure’s anchor and the satellite manager may be
a high active share, high tracking error, conviction-driven manager where risk can be afforded. Callan
advocatesforactivemanagementinlessefficientassetclassessuchasemergingmarkets.Historyhas
shown that active management over longer time periods generally outperforms the MSCI Emerging
Markets Index and adds value (Exhibit 5). A “batting average” of rolling three-year outperformance when
considering various fee hurdles is shown in the Appendix, Exhibit 12.
Exhibit 5
Rolling 12-Quarter
Excess Return
relative to MSCI
Emerging Markets
20 Years ended
December 31, 2015
Source: Callan
-10%
0%
10%
20%
07 08 09 10 11 12 13 14 15989796 99 06050403020100
Callan Emerging Markets Style (10th–90th percentile) Median
9Knowledge. Experience. Integrity.
Is environmental, social, and governance (ESG) investing appropriate for emerging markets?
Andy Iseri Our current approach to ESG investing, which is similar to how we approach all aspects of investing,
is to gather information, conduct research, gain broad knowledge, and assist our clients in making an
informed decision that is right for them.
ESG investing in emerging markets offers risks and opportunities. There is opportunity that emerging
countries “leap-frog” togreener,moreenergy-efficienteconomies.Therearealso risks thatdataand
corporatefilingsare less robustand less reliablegiven less-developed (albeit improving)accounting
and reporting standards.
Emerging markets represent approximately 10% of the global investment universe for public equity. Is this a reasonable allocation?
Ho Hwang A strategic 10% weight to emerging markets within a public equity allocation is reasonable, considering
suchexposurewouldbeinlinewithitsmarketcapitalizationinthepublicequityuniverse(definedbythe
MSCI ACWI IMI). Historical emerging market exposure for the global universe is shown in the Appendix,
Exhibit 13. Although Callan’s 10-year return forecasts point to higher returns from emerging markets
relative to other equity asset classes, they are accompanied by higher risk (volatility), which can lead to a
less-favorablerisk/returnprofile.Despitesucharisk/returnprofile,thecurrentvaluationspreadbetween
developed and emerging markets may create an opportunity for a tactical emerging market overweight.
Investors should also take note of the assumptions used in their asset-allocation and asset-liability stud-
ies. Any deviation from these assumptions would constitute “assumption risks.”
For Further Reading
To learn more about emerging markets and related topics, see the following research on Callan’s website:
• ThePeriodicTableCollection:RankingsofAssortedIndicesandStrategies
• 2016 Capital Market Projections
• Global Equity Benchmark Review
• Going Global? (charticle)
10
AppendixSection 1: Detailed Discussion of Emerging Market (EM) Risks
Natural Resources: Investors face daily headlines about the price of oil and other commodities. Dramatic
price declines have put a strain on many resource-producing countries. Several EM governments rely on
oil revenue to fund their budgets. This can affect entire societies as funding for social programs becomes
challenged. Notable resource-producing EM countries include Russia, United Arab Emirates, Brazil, and
Mexico. EM oil producers include Saudi Arabia, Iran, Iraq, and Kuwait. “Lower for longer” is a threat to both
economicandsocialstability,aswellastocorporateprofits, forproducers.Theoil/commodityenviron-
ment isnotbadforallcountries.Countriesthatareconsumersoftheseresourcesdirectlybenefitfrom
lower prices. Emerging and frontier countries topping this list include China, India, South Korea, Taiwan,
Thailand, and Poland. The natural resources environment is an area of both risks and opportunities.
China Slowdown: Another story topping the news is the slowdown in China. China was considered the
driver of global economic growth until 2011. Since then, China’s year-on-year GDP growth (Exhibit 6) fell
from 12% to estimates of about half of that. This slowdown has broadly affected commodity producers
and exporters to China. China’s slowdown coincides with an economic shift from focusing on manufactur-
ing to services and consumers. Along with corruption and market reforms, the eventual outcome of these
dynamic forces is uncertain.
-5%
0%
5%
10%
15%
1980 2010 2015199519901985 20052000
GD
P G
row
th
U.S. Growth China GrowthExhibit 6:
GDP Growth
U.S. and China
Sources: Callan, statisticstimes.com
11Knowledge. Experience. Integrity.
Currency: Non-U.S. exposure for U.S.-based investors includes the investment security and the currency
it is denominated in. Simply put, if a currency goes up (U.S. dollar weakness or foreign currency strength)
it helps returns, if a currency goes down (U.S. dollar strength or foreign currency weakness) it detracts.
Currency risk from emerging market exposure has been heightened by the recent rise in the U.S. dollar.
As central banks around the globe balance their mandates for economic stability, employment, and com-
petitiveness, currency volatility has increased to the detriment of U.S. dollar-based investors. Exhibit 7 shows the relative performance of MSCI EM Local Currency to the standard U.S. dollar-denominated index
to highlight the currency effect to U.S. dollar-based investors. Currency effect has been generally nega-
tive since 2011. The question facing investors is whether the dollar’s upswing is largely done—or if there’s
more to come.
Rising U.S. Interest Rates: Conventional wisdom says that the U.S. Federal Reserve is in a tightening
phase. Strong economic growth relative to the rest of the world has most investors expecting a contin-
ued path to higher interest rates in the U.S. For emerging countries this poses two problems. First, as
globalassetsseekhigher-yieldinglow-riskassets,capitalflowstotheU.S.fromothercountries—including
emergingmarkets.Manyemergingeconomiesrelyonforeigninvestmenttofundgrowth—capitaloutflows
from those countries risks the slowing of investment. A second risk to emerging markets from higher U.S.
interest rates concerns external debt. Many governments, corporations, and banks in emerging markets
tookadvantageoflow-costU.S.dollar-denominatedfinancing.Itisestimatedthatover$4trillioninU.S.
dollar-denominated debt exists in emerging markets. As U.S. interest rates rise, capital leaves, and emerg-
ing currencies devalue, servicing this debt could be problematic. Countries facing the highest external debt
challenges include Brazil, Turkey, and South Africa.
Non-Financial Risks: The sources of risk when investing in any country are too numerous to list, but
investors should consider things like shareholder rights, rule of law, corruption, etc. Some key risks and
country ratings for 2015 are shown in Exhibit 8.
-13.4%
3.2%
2006
-6.2%
1.4%
-5.5%
4.9%
20142013201220112010200920082007 2015
10.3%
4.5%
-6.6%
-9.4%
Sources: Callan, MSCI
Exhibit 7
Calendar Year Relative Returns of MSCI EM (unhedged) to MSCI EM Local Currency
12
Source: World Economic Forum
Judicial independence
1-7 (best)
Property rights
1-7
Favoritism in decisions of government
officials 1-7
Organized crime
1-7
Strength of auditing and
reporting standards
1-7
Soundness of banks
1-7
Regulation of securities exchanges
1-7
Protection of minority
shareholders’ interests
1-7
Strength of investor protection 0–10 (best)
Brazil 3.6 4.0 2.6 3.9 5.2 6.1 5.4 4.7 5.3
Chile 5.2 5.0 4.0 5.5 5.2 6.3 5.3 4.6 6.3
China 4.0 4.5 4.1 4.7 4.4 5.0 4.4 4.1 5.0
Colombia 2.8 3.9 2.6 2.8 4.5 5.8 4.0 4.1 8.3
Czech Republic 3.9 4.0 2.6 5.0 4.9 5.9 4.4 4.1 5.0
Egypt 4.0 3.6 3.7 3.5 3.8 4.2 3.5 3.5 3.7
Greece 3.7 3.9 2.6 5.5 4.3 2.8 3.7 4.3 5.3
Hungary 4.0 3.7 2.4 4.9 5.2 4.8 4.4 4.1 4.3
India 4.2 4.1 3.4 4.0 4.2 4.3 4.3 4.1 6.3
Indonesia 3.9 4.3 3.9 4.2 4.6 5.1 4.5 4.6 6.0
Malaysia 4.9 5.3 4.5 5.2 5.7 5.7 5.5 5.3 8.7
Mexico 3.2 4.0 2.7 2.7 5.0 5.6 4.8 4.3 5.7
Morocco 3.5 4.9 3.5 5.7 5.0 5.6 4.5 4.3 4.7
Pakistan 3.8 3.3 2.6 3.0 4.3 4.8 4.5 4.0 6.3
Peru 2.5 3.5 2.7 3.1 5.0 5.8 4.8 4.3 7.0
Philippines 3.6 4.3 3.1 4.7 5.1 5.5 4.6 4.5 4.3
Poland 4.1 4.3 3.1 5.6 4.9 5.4 4.9 4.0 6.0
Qatar 6.0 6.0 5.6 6.7 6.0 6.3 5.9 6.0 4.3
Russia 2.9 3.3 2.8 4.2 4.1 4.0 3.7 3.5 4.7
South Africa 5.4 5.6 2.6 4.3 6.7 6.5 6.4 6.1 8.0
South Korea 3.5 4.2 2.9 4.3 4.4 3.9 3.7 3.4 6.0
Taiwan 4.2 5.7 4.1 5.8 5.7 5.7 5.4 5.1 6.3
Thailand 3.8 4.1 2.8 4.5 5.1 5.7 5.0 4.9 7.7
Turkey 3.1 4.6 3.2 4.4 4.8 5.7 4.6 4.3 6.3
UAE 5.6 5.5 5.3 6.8 5.5 5.9 5.5 5.3 5.0
Exhibit 8: Key Risks by Country
13Knowledge. Experience. Integrity.
Section 2: A Deeper Dive Into the MSCI Indices
Thesignificanceofcountryofdomicileforcompaniesisdiminishingduetoglobalization.Assuch,MSCI
has developed a methodology to calculate the economic exposure of the underlying constituent companies
by segregating their revenues based on geographic distribution. The following exhibits provide the regional
economic exposure for the various indices. The economic exposure for the MSCI Emerging Markets Index
hasbeenconsistentoverthepastfiveyears(Exhibit 9). In 2010, 81% of the Index was economically tied
to emerging markets, which declined only by 2% in 2015 to 79%. As the engine of growth in emerg-
ing markets, China is the biggest revenue contributor with 37% in 2015, which increased by 13% from
24% in 2010. Interestingly, the Emerging Markets Small Cap Index (Exhibit 10) has a similar economic
exposureprofile,with83%ofrevenuescomingfromemergingmarkets.Theeconomicexposureforthe
MSCI Frontier Markets Index (Exhibit 11) hasevolvedoverthepastfiveyears.In2010,58%ofrevenue
was driven by frontier markets. In 2015, it jumped to 80%, suggesting some economic convergence within
frontier markets.
7.2%
Developed Markets
57.9%
80.3%
9.7%12.0%
Frontier MarketsEmerging Markets Other Countries
20.4% 6.9% 5.6%
80.9% 79.6%
2010 2015
17.6%
Developed Markets
1.4% 1.5% 2.3%15.4%
Frontier MarketsEmerging Markets Other Countries
80.9% 78.9%
2.0%
13.6%
Developed Markets
1.2% 1.3% 2.0%15.6%
Frontier MarketsEmerging Markets Other Countries
81.1% 83.2%
2.0%
Exhibit 11
Economic Exposure for the MSCI Frontier Markets Index
Exhibit 9
Economic Exposure for the MSCI Emerging Markets Index
Exhibit 10
Economic Exposure for the MSCI Emerging Markets Small Cap Index
Sources: Callan, MSCI
14
0%
4%
8%
12%
16%
20152006 2010200920082007 2014201320122011
11.0% 10-Year Average Emerging Market Exposure
Sources: Callan, MSCI
Exhibit 13
Emerging Markets
Exposure within
MSCI ACWI IMI
for 10 Years ended
December 31, 2015
Section 3: Other Exhibits
Fee Hurdle 0.70% 0.75% 0.80% 0.85% 0.90% 0.95% 1.00% 1.05% 1.10% 1.15%Median 65% 65% 63% 63% 61% 58% 56% 56% 56% 51%
45th Percentile 74% 71% 71% 71% 70% 69% 69% 68% 68% 65%
40th Percentile 81% 81% 80% 79% 79% 76% 76% 74% 74% 73%
35th Percentile 91% 91% 90% 90% 88% 86% 84% 84% 84% 84%
30th Percentile 99% 99% 99% 98% 96% 96% 96% 96% 95% 94%
25th Percentile 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
AverageAnnualizedExcessReturn–MedianManager:1.45%
Exhibit 12
Batting Average of
3-Year Periods Where
Peer Group Median
Manager Beats the
Benchmark by More
than Typical Fee Hurdles
The median manager in Callan Emerging Markets Broad peer group had an average annualized excess
return of 1.45%.
Source: Callan
15Knowledge. Experience. Integrity.
Sources: Barclays, MSCI, Russell, Standard & Poor’s
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
MSCI Emerging Markets
32.6%
MSCI Emerging Markets
39.8%
Barclays Aggregate
5.2%
MSCI Emerging Markets
79.0%
Russell 2000
Growth
29.1%
Barclays Aggregate
7.8%
MSCI Emerging Markets
18.6%
Russell 2000
Growth
43.3%
S&P 500 Growth
14.9%
S&P 500 Growth
5.5%
MSCI EAFE
26.3%
MSCI EAFE
11.2%
Barclays Corp High
Yield
-26.2%
Barclays Corp High
Yield
58.2%
Russell 2000
26.9%
Barclays Corp High
Yield
5.0%
Russell 2000 Value
18.1%
Russell 2000
38.8%
S&P 500
13.7%
S&P 500
1.4%
Russell 2000 Value
23.5%
S&P 500 Growth
9.1%
Russell 2000 Value
-28.9%
Russell 2000
Growth
34.5%
Russell 2000 Value
24.5%
S&P 500 Growth
4.7%
S&P 500 Value
17.7%
Russell 2000 Value
34.5%
S&P 500 Value
12.4%
Barclays Aggregate
0.5%
S&P 500 Value
20.8%
Russell 2000
Growth
7.0%
Russell 2000
-33.8%
MSCI EAFE
31.8%
MSCI Emerging Markets
19.2%
S&P 500
2.1%
MSCI EAFE
17.3%
S&P 500 Growth
32.8%
Barclays Aggregate
6.0%
MSCI EAFE
-0.8%
Russell 2000
18.4%
Barclays Aggregate
7.0%
S&P 500 Growth
-34.9%
S&P 500 Growth
31.6%
Barclays Corp High
Yield
15.1%
S&P 500 Value
-0.5%
Russell 2000
16.3%
S&P 500
32.4%
Russell 2000
Growth
5.6%
Russell 2000
Growth
-1.4%
S&P 500
15.8%
S&P 500
5.5%
S&P 500
-37.0%
Russell 2000
27.2%
S&P 500 Value
15.1%
Russell 2000
Growth
-2.9%
S&P 500
16.0%
S&P 500 Value
32.0%
Russell 2000
4.9%
S&P 500 Value
-3.1%
Russell 2000
Growth
13.3%
S&P 500 Value
2.0%
Russell 2000
Growth
-38.5%
S&P 500
26.5%
S&P 500
15.1%
Russell 2000
-4.2%
Barclays Corp High
Yield
15.8%
MSCI EAFE
22.8%
Russell 2000 Value
4.2%
Russell 2000
-4.4%
Barclays Corp High
Yield
11.8%
Barclays Corp High
Yield
1.9%
S&P 500 Value
-39.2%
S&P 500 Value
21.2%
S&P 500 Growth
15.1%
Russell 2000 Value
-5.5%
S&P 500 Growth
14.6%
Barclays Corp High
Yield
7.4%
Barclays Corp High
Yield
2.5%
Barclays Corp High
Yield
-4.5%
S&P 500 Growth
11.0%
Russell 2000
-1.6%
MSCI EAFE
-43.4%
Russell 2000 Value
20.6%
MSCI EAFE
7.8%
MSCI EAFE
-12.1%
Russell 2000
Growth
14.6%
Barclays Aggregate
-2.0%
MSCI Emerging Markets
-1.8%
Russell 2000 Value
-7.5%
Barclays Aggregate
4.3%
Russell 2000 Value
-9.8%
MSCI Emerging Markets
-53.2%
Barclays Aggregate
5.9%
Barclays Aggregate
6.5%
MSCI Emerging Markets
-18.2%
Barclays Aggregate
4.2%
MSCI Emerging Markets
-2.3%
MSCI EAFE
-4.9%
MSCI Emerging Markets
-14.6%
Callan Periodic Table of Investment Returns Annual Returns for Key Indices Ranked in order of Performance
16
Biographies
Ho Hwang is a vice president and a non-U.S. equity investment consultant in the Global Manager
Research group. Ho joined Callan in 2012. He is responsible for research and analysis of non-U.S.
equity investment managers and assists plan sponsor clients with non-U.S. equity manager searches.
Ho regularly meets with investment managers to develop an understanding of their strategies, prod-
ucts, investment policies and organizational structures. Prior to joining Callan, Ho worked as a senior
investment analyst for Progress Investment Management Company. Ho earned a BA in Economics from
University of California at Davis.
Andy Iseri, CFA, is a senior vice president and a non-U.S. investment consultant in Callan’s Global
Manager Research group. He is responsible for research and analysis in the non-U.S. and global asset
class including developed and emerging equity, issues surrounding currency management, as well as
matters related to ESG investing. He oversees manager searches, conducts on-site visits, and attends
finalistinterviews.Andyisashareholderofthefirm.PriortojoiningCallan,Andyspentsixyearsselecting
and evaluating domestic and international equity managers for the California State Teachers’ Retirement
System.Prior to that,Andymanagedandtradeddomesticfixed incomeassetsatCalSTRS.Healso
assisted in the plan’s currency, securities lending and credit enhancement programs. Before joining
CalSTRS’ investmentdivisionAndywasaSeniorAccountant in theplan’sbenefitaccountinggroup.
Andy earned a BS in Business Administration - International Business at California State University,
Sacramento. He belongs to CFA Institute, CFA Society of Sacramento, and earned the right to use the
Chartered Financial Analyst designation.
Lyman Jung is a vice president and a non-U.S. equity investment consultant in Callan’s Global Manager
Research group. He is responsible for research and analysis in the non-U.S. and global asset classes
including developed and emerging markets. In this role, Lyman meets regularly with investment manag-
ers to develop an understanding of their strategies, products, investment policies and organizational
structures. Prior to Lyman’s current role, he was the Operations Manager for the group where he man-
aged the group’s analyst team and coordinated search workflow. His responsibilities also included
qualitative and quantitative analysis of investment managers and the production of research and client
reports. Lyman earned his B.A. in Economics from the University of California, Los Angeles and is a
Level III candidate in the CFA Program.
17Knowledge. Experience. Integrity.
Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational pur-poses only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact. The Callan Investments Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.
If you have any questions or comments, please email [email protected].
About Callan
Callanwas foundedasanemployee-owned investment consultingfirm in1973.Ever since,wehave
empowered institutional clients with creative, customized investment solutions that are uniquely backed
by proprietary research, exclusive data, ongoing education and decision support. Today, Callan advises
onmorethan$1.8trillionintotalassets,whichmakesusamongthelargestindependentlyownedinvest-
mentconsultingfirmsintheU.S.Weuseaclient-focusedconsultingmodeltoservepublicandprivate
pensionplansponsors,endowments,foundations,operatingfunds,smallerinvestmentconsultingfirms,
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