Next 11 Emerging Markets Fund - Castlestone · PDF fileNext 11 Emerging Markets Fund. ... 7%...

Next 11 Emerging Markets Fund

Fund presentation

DECEMBER 2010

“There is not a lot of correlation between these 11 countries

and between them and the developed world. It actually does,

from a portfolio perspective, offer some benefits.”

Jim O’Neill – Goldman Sachs

(Financial Times, 13 September 2010)

2 www.castlestonemanagement.com

The N-11 Emerging Markets / Why you should own them?

Challenges

Conclusion

Why buy N-11 today?

Source: Castlestone Management

“It will be niche...but these areas will be successes over the longer term.”

Mark Dampier – Head of Research, Hargreaves Lansdown

(Money Market, 9 September 2010)

“I see it as a bridge between global emerging markets and single country funds but, more interestingly, between the

world’s developed and frontier markets.”

Adrian Lowcock – Bestinvest, Senior Investment Adviser

(Money Market, 9 September 2010)

Next 11 Emerging Markets Fund


BRIC – Brief History of the Goldman’s Concept

2001 Economist Jim O‟Neill of Goldman, Sachs & Co. coins the term „BRIC‟ - highlighting the four nations with the potential

to become some of largest and most important economies in the world in the coming decades: Brazil, Russia,

India and China. *

2005 „How Solid are the BRICs?‟ finds that since the team at Goldman Sachs began writing about the concept, each of

the four countries has grown more strongly than initially projected. *

2007 „BRICs and Beyond‟ takes a look beyond the BRIC countries to overarching global themes that can be attributed to

the growth of the BRIC economies. *

Goldman’s Concept – The Next 11

2005 Goldman, Sachs & Co. introduced the notion of N-11. The purpose was to identify those countries that could potentially

have a BRIC-like impact in rivalling the G7 (seven industrialized nations – Canada, France, Germany, Italy, Japan,

United Kingdom and United States) *

2007 N-11 – „More Than an Acronym‟ - increased focus on these countries: Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico,

Nigeria, Pakistan, Philippines, Turkey and Vietnam *

Source: *Goldman Sachs Global Economics Papers – GS Global Economic Website.

Creation of the N-11 concept and its evolution


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


Source: *Goldman Sachs ,Bloomberg & Castlestone Management

Note: Past performance cannot be relied on as a guide to future performance.

Rapid economic development*

Large and often growing populations*

Ongoing Urbanisation*

Increasing integration with global economy*

Strong macro fundamentals and economic management*

Domestic demand driven economies*

Rising consumer class

Beneficiary of global capital

investment trends

Strong equity market performance

Multi-Decade Secular, Not Cyclical Trends

What are the Next 11 Emerging Markets?


Source: *2009 IMF, 1999 nation master. ** The Economist Pocket World Figures 2010.


$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%

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

GDP per capita* / Population**


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


Index/Country 2010 YTD*

S&P 500 +3%

EURO STOXX 600 -8%

Nikkei 225 -11%

FTSE 100 +3%

MSCI Emerging Markets +8%

MSCI BRIC +3%

Bovespa (Brazil) +1%

RTS Standard (Russia) +1%

Bombay SE500 (India) +16%

Hang Seng China Ent Index (China -

HK)+2%

CSI 300 (China - Local) -18%

Index/Country 2010 YTD*

DSE General (Bangladesh) +56%

TEPIX (Iran) +67%

NSE All Share (Nigeria) +9%

JCI (Indonesia) +38%

PSEi (Philippines) +34%

ISE Nat 100 (Turkey) +25%

Karachi 100 (Pakistan) +6%

Ho Chi Minh (Vietnam) -8%

Egypt Hermes +8%

Kopsi (Korea) +11%

Mexico ICP +3%

Index/Country Annualised Return 2001 – 2010**

N-11 +22%

BRIC +20%

Emerging Markets +16%

S&P 500 +2%

Topix 500 +2%

EUROSTOXX 600 +6%

How have the Next 11 performed


Source: Bloomberg & Castlestone Management. Date range: Jan 2009 to Sept 2010. N-11: Next-11 Core 8 Index, BRIC: MSCI BRIC Index, Emerging Markets: MSCI Emerging Markets Index TR


50%

100%

150%

200%

250%Next -11

Dec 2008 Feb 2009 Apr 2009

Emerging Markets

Jun 2009 Aug 2009 Oct 2009 Apr 2010Dec 2009 Feb 2010

BRIC

Cu

mu

lative R

etu

rns

Jun 2010 Aug 2010

Next 11 vs. Emerging Market performance


Source: Bloomberg & Castlestone Management. As of July 2010.


MSCI Emerging Markets IndexNext 11 Emerging Markets

(Indicative Weightings)

Index Weightings – Emerging Market diversification

MSCI Country Next 11

0% Bangladesh 2%

16% Brazil 0%

17% China 0%

1% Egypt 5%

7% India 0%

2% Indonesia 18%

0% Iran 5%

13% Korea 10%

4% Mexico 28%

0% Nigeria 3%

0% Pakistan 2%

0% Philippines 7%

7% Russia 0%

7% South Africa 0%

11% Taiwan 0%

2% Turkey 17%

0% Vietnam 3%


Source: Castlestone Management.


10% 65% 20-25% 0-5%

Leader Core Frontier Proto

Korea Mexico Egypt Bangladesh

Indonesia Vietnam Iran

Turkey Pakistan

Philippines Nigeria

Wide Range of Investment Profiles

Universe Focused on Core Countries

Investment perspective – breaking down the Next 11



The Fund may invest in other countries from time to time which display some N11 characteristics

Olympic Group

N 11 Company

& N11 Listing

Largest manufacturer of “white

goods” (e.g. Refrigerators in

MENA), with 27% market share in

Egypt

Attractive outlook, with 62% of

Egypt‟s population between 18-30

years old→

→ marriages→ new household

creation→ demand for property→

demand for white good to outfit...

Partnership just signed with

Electrolux- exciting export growth

opportunity and sign of corporate

competence/integrity

Currently Egyptians use for entire

life of the good, GDP growth will

shorten upgrade cycle, increasing

demand

Cheap valuation relative to BRIC

peers, despite similar growth

prospects:

2010F P/E

Olympic Group: 8.4x

Haier (China): 16.8x

Whirlpool India: 19.9x

Fresnillo

World‟s largest Silver Miner- based

in Mexico, but London listed

Benefit of low Mexican operating

costs and fast growth (production

doubling by 2018)

Operating for 125 years, with

Western calibre management, but

advantage of an established

Mexican company as controlling

shareholder

EM growth/costs, but London listing

means better share liquidity,

corporate governance and FTSE100

membership

MTN

N11 Exposure, but not N11

Company nor N11 Listed

Largest mobile-phone operator in

Africa –Nigeria/Iran >50% of profits

Benefit of local experience,

operating in emerging markets

Best of both worlds? Fast N-11

growth, but world class South

African management team and

corporate governance.

Air Asia

Neither N-11 company, nor N-11

listed, but growing N-11 presence

Low cost airline in South-East Asia:

established in Malaysia and

Thailand, expanding into Indonesia

and Vietnam

Lowest operating costs of any airline

worldwide, with robust demand-

29% profit margins

Indonesia is very exciting

opportunity:

230m People

17,500 islands

5-6% GDP growth

Poorly run state owned airline

dominates industry

Cheap Valuation:

2010F P/E

Air Asia: 9.4x

Easyjet: 14.5x

Gol: 22.9X

Investment universe – potential investments


Economic – historically yes (e.g. Tequila Crisis), arguably N-11‟s fundamentals are healthier than in the past,

whilst G7‟s have deteriorated

Geopolitical – diversified geographically, bigger exposures are not closely linked (e.g. Mexico, Turkey)

Settlement / Custody – higher-risk markets will make up a smaller part of the portfolio & individual risk

exposure is managed

Currency – diversified markets with multiple currencies, largely unhedged


Mandate has flexibility to adequately respond to above risks (e.g. can invest in ‘N-11 in Principle markets’)

Challenges – managing risk


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

Next 1130%

GEM or BRIC70%

Where does this fit in you portfolio*


Long-Term – fundamental case is clear (robust outlook verified by performance history)

Short-Term – stock markets remained uncorrelated during „Euro Crisis‟

Current market conditions require diversification, BRIC is too China-centric

Next 11 economies are well diversified and are largely domestic driven

Source: Bloomberg & Castlestone Management

Conclusion


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.

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

Appendix – investment philosophy



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 ScreensFundamental / Valuation

SnapshotRigorous AnalysisUniverse Demarcation

Portfolio Construction Decision ValuationExecution

WatchlistPortfolio Management

Appendix – investment process


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

Portfolio Manager

Arrash Zafari joined Castlestone Management as a Portfolio Manager, Equities in May 2010. Arrash joined from the Asia Pacific and Global Emerging Markets team of First

State Investments (Edinburgh/London). He previously worked at Millennium Capital Partners (London) and started his investment career at Orbis Funds, where he spent four

years. Prior to entering the industry, he worked at Ernst & Young in the Financial services Audit Division. Arrash holds an Honours Masters degree in International Relations

from the University of St Andrews, UK.


Appendix – approach to risk management


This document is intended only for professional investors and advisers. The document is neither directed at, nor intended for the use of, the general public. Neither this

document nor any copy of it may be distributed, directly or indirectly, in the United States of America or its territories or possessions (the “United States” or to any US Person as

defined in Regulation S under the United States Securities Act of 1933 (as amended). Any failure to comply with these restrictions may constitute a violation of United States

securities law.

The material contained within this document is not comprehensive and is indicative, provided for information purposes only. The past performance data is used for reference

purposes only. Its inclusion should not be construed as any representation relating to the Fund‟s future performance. The price of shares and the income derived there from may

go down as well as up and loss of the entire initial investment may occur

Where Castlestone Management has expressed views and opinions, these may change without notice. The material contained in these pages is based upon information which

is considered to be reliable and/or derived from a dependable source; however, we cannot represent that third-party information is completely accurate, and, as such, should not

be relied upon.

This document must therefore be read in conjunction with the Confidential Explanatory Memorandum (“CEM”) or Prospectus and Supplement, which contains material

information not contained herein, including terms of investment, investment risks and restrictions, fees and expenses, and details of any conflict of interests. Please refer to the

Fund‟s documents for detailed information and/or seek relevant professional advice before making any investment decision. The Funds documents can be obtained by making a

request to [email protected]. In the event that an investment is made in the Fund, the information in this document will be superseded, amended and/or

supplemented in its entirety by the Fund‟s documents.

“It is envisaged that Castlestone Management will establish a UCITS compliant version of the Next 11 Emerging Markets Fund which will be domiciled in Ireland (the “UCITS

Fund”). It is likely that the Next 11 Emerging Markets Fund Inc will invest some or all of its assets into the UCITS fund; however, in those circumstances the Next 11 Emerging

Markets Fund Inc will not charge additional fees over and above those fees charged by the UCITS fund”.

This document does not constitute an offer or solicitation to sell shares in any of the funds mentioned, by anyone in any jurisdiction in which such offer or solicitation is not

authorised or to any person to whom it is unlawful to make such offer or solicitation. Prospective investors interested in acquiring funds should inform themselves as to (I) the

legal requirements in the countries of their nationality, residence, ordinary residence or domicile; (ii) any foreign exchange controls; and (iii) any relevant tax consequences.

Prospective investors are urged to take professional advice as to financial, legal and tax consequences of any investment.

Except where otherwise referenced or credited, this document and the information as expressed herein is the property of Castlestone Management. No part of this material shall

be copied, duplicated or distributed without prior written consent from Castlestone Management. Any retransmission, dissemination or other unauthorised use of this document

by any person or entity is strictly prohibited.

Castlestone Management Limited is authorised and regulated by the Financial Services Authority in the UK. Castlestone Management Limited is authorised by the Financial

Services Board in South Africa. Castlestone Management Inc. is regulated by the British Virgin Islands Financial Services Commission. In Singapore, some of Castlestone

Management's funds are registered as restricted recognised schemes with the Monetary Authority of Singapore for distribution to institutional and accredited investors.

October 2010

Important information

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