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

Frontier and Emerging Markets

James E. MeketaManaging Principal, ChairmanMeketa Investment Group, Inc.Westwood, Massachusetts

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• 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?

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Global Markets

• Developed• Emerging• Frontier

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Developed Markets

Population GDP

North America (U.S. and Canada)

350M $19T

Europe 500M $18T

Japan 127M $5T

Australia 24M $2T

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Characteristics of Developed Markets

• Stable governments• Efficient and transparent financial

institutions• Currencies managed by strong central

banks• High but stagnant per capita incomes

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Characteristics of Developed Markets

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

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Global Significance of Developed Markets

• Population 14%• Share of Global GDP 50%

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50% of All Global Wealth Creation Takes Place in

Emerging and Frontier Markets

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Emerging Markets (the Big Four)

Population GDP

China 1,300M $11T

India 1,300M $2T

Brazil 200M $2T

Russia 142M $2T

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Other Emerging Market Countries

Mexico Peru

Indonesia Nigeria

Turkey South Africa

Saudi Arabia

South Korea

Malaysia

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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

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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

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Growth of Emerging Markets

2000 37% global GDP

2016 50% global GDP

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Benefits of Diversification

Developed Markets Emerging MarketsStability High Growth/ReturnsSafety High Growth/Returns

Liquidity High Growth/ReturnsInnovation High Growth/Returns

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Expected Returns

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

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Why Are Emerging Market Expected Returns so

Much Higher?

• Demographics

• Global connectedness

• Free technology transfers

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Demographics

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

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Connectedness

• China 1943• Mongolia 2011• Argentina 2015

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Free Technology Transfers

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

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Emerging Global Middle Class

China 1,300 millionIndia 1,300 millionBrazil 200 millionVietnam 90 millionIndonesia 250 millionTurkey 75 millionSouth Korea 50 million

Between 2 Billion and 2.5 Billion are Middle Class

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Emerging Global Middle Class

• Pets• Braces• Clean public toilets• Local tourists

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What Do They Look Like?

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Lima, Peru 1989 Shining Path Guerillas

Lima, Peru 2012

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Mongolia 1989 Communist Dictatorship

Mongolia 2011

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What Are Frontier Markets?

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

But also: • Vietnam• Bulgaria

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Frontier Markets

• Exciting to visit• Virtually impossible to invest

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What Risks Should Trustees Consider?

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Active or Passive?

• Large Allocations: Active• Small Diversification Allocation: Passive

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Public Market Funds

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

$4 billion

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What About Private Equity and Debt?

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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

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Frontier Private Market Funds

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

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62nd Annual Employee Benefits ConferenceNovember 13-16, 2016Orlando, 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

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2017 Educational ProgramsInvestments

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

Investments InstituteMarch 13-15, 2017 Phoenix, Arizonawww.ifebp.org/investments

Portfolio Concepts and ManagementMay 1-4, 2017 Philadelphia, Pennsylvaniawww.ifebp.org/wharton

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

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

816

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