HOW IT WORKS

Country structure
With any multi-country portfolio, country selection and weighting have the largest effect on the risk and return experience of our strategy. Our research into emerging countries has resulted in some important observations.

Diversification is paramount—the more countries the better.
Individually, emerging markets can be volatile, but they also exhibit relatively low correlations among each other and developed markets. Due to its tendency to move relatively independently, a portfolio structure of balanced exposure to a broad array of emerging market countries can substantially reduce volatility compared to that found in individual countries or more traditionally concentrated active strategies.

In trying to include as many opportunities as prudent, our investable universe starts with countries defined as "emerging" by a major index provider and / or countries with per-capita gross national incomes of less than US$9,000. Countries must meet criteria such as breadth of market, liquidity and accessibility to foreign investors.

Equal country weighting among tiers is the best starting point.
We believe in treating each country as a separate and unique opportunity, and thus starting from a position of equal country weights, is better than saluting the distortions of relative capitalization across these markets.

We distribute approximately 40 countries among four tiers based primarily upon capitalization size and liquidity—though this process can be modified due to specific country issues. Target weights for the countries are equally weighted within each tier. Employing this structure allows us to capture the potential of asset class (and particularly the smaller markets) in a diversified manner.

Rebalancing adds return while reducing risk.
Markets will, over time, move the portfolio away from its targeted positioning. If left unattended, assets will concentrate in the best performing markets, leaving the investor overweighted in areas of recent strength. Our rebalancing efforts are primarily aimed at avoiding this concentration. What's more, our research has shown a disciplined strategy of reducing allocations after periods of substantial appreciation has both a return-enhancing and risk-reducing effect. This rebalancing strategy is implemented by evaluating the portfolio and trimming countries back to target if they deviate in excess of 50% of their target weight. We expect total turnover to be approximately 20-30% annually.

Sector and Security Structure
As emerging market countries mature, the economy often broadens, driving the growth of the key underlying sectors. Natural-resource wealth and cheap labor may be translated into a growing industrial base which in turn can drive demand for sectors like utilities and financials. As the population becomes wealthier, the consumer sector grows. Due to such distortions as the timetable of privatizations, capitalization-weighted indexes often under-represent the true economic potential of all the sectors of an economy. Recognizing this, our portfolio categorizes each country's stocks into five aggregate sector groups: Consumer, Financial, Resource-Based, Industrial and Utility. The portfolio's exposure to each sector is targeted to roughly equivalent levels but constrained to be at least 75% of that sector's capitalization weight within the benchmark's country index. This allows allocation to many sectors that are under-represented on a cap-weighted basis while minimizing severe underweights of sectors that dominate their index. Within each sector, stocks are selected and generally weighted by their capitalization. This avoids excess concentration and enhances diversification.