1
The Impact of Emerging Marketsin the Search for Global AlphaPedro V. MarcalPortfolio Manager Global Select, Nicholas-Applegate PortfolioConstruction Conference 2006
Allianz Global Investors Australia LimitedABN 63 003 171 533 AFSL 244 322
2
Agenda
Historical Role in Emerging Markets
Impact Today of Emerging Markets
Alternative Method of Gaining Exposure
Nicholas-Applegate Global Select
Conclusion and questions
3
Emerging Markets Delivered Solid Returns
As of 30-Jun-06Source: FactSet
Annual Returns – 2003 to 2006
28.4
38.5
53.1
34.3
10.6
20.7 22.6
15.3
4.9
13.3
36.1
10.9
2.7
10.66.7 6.4
0
10
20
30
40
50
60
S&P 500 MSCI EAFE MSCI EMF MSCI ACWI
2003 2004 2005 First Half 2006
Annual Returns – 2003 to 2006
4
Growth of a Dollar
0
1
2
3
4
5
6
7
8
92/
29/1
988
3/1/
1989
3/1/
1990
3/1/
1991
2/29
/199
2
3/1/
1993
3/1/
1994
3/1/
1995
2/29
/199
6
3/1/
1997
3/1/
1998
3/1/
1999
2/29
/200
0
3/1/
2001
3/1/
2002
3/1/
2003
2/29
/200
4
3/1/
2005
3/1/
2006
USA AUS EM
Exposure to Emerging Markets Benefited Investors
5
Volatility
Source: FactSet
As of 21-Jun-06
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2/28
/199
1
2/28
/199
2
2/28
/199
3
2/28
/199
4
2/28
/199
5
2/28
/199
6
2/28
/199
7
2/28
/199
8
2/28
/199
9
2/28
/200
0
2/28
/200
1
2/28
/200
2
2/28
/200
3
2/28
/200
4
2/28
/200
5
2/28
/200
6
US AUS EM
Standard Deviation of monthly average return (3 year moving average)
6
Globalization Transforms the Role of Emerging Markets
Source: Morgan Stanley and Nicholas-Applegate As of 21-Jun-06
-
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.02/
28/1
991
2/28
/199
2
2/28
/199
3
2/28
/199
4
2/28
/199
5
2/28
/199
6
2/28
/199
7
2/28
/199
8
2/28
/199
9
2/28
/200
0
2/28
/200
1
2/28
/200
2
2/28
/200
3
2/28
/200
4
2/28
/200
5
2/28
/200
6
US-EM Correlation3-yr. rolling
AUS-EM Correlation3-yr. rolling
Three-year rolling correlation
7
Integrated Global Alpha is Greater Than the Sum of its Parts
α EMF+α EAFE+α US>α Global
Expanded Opportunity Set
Leverage Knowledge Gained From Experience of Developed Markets
Exploit Beneficiaries of Emerging Market Trends Regardless of Company Domicile
8
Emerging Markets Broadens the Opportunity Set
Source: Morgan Stanley; FactSet As of 30-Jun-06
Number of Companies
Sector Emerging Global
US EAFE+Canada EMF ACWI
Consumer Discretionary 121 226 104 451
Consumer Staples 35 95 80 210
Energy 48 70 40 158
Financials 127 256 171 554
Health Care 68 61 24 153
Industrials 65 250 128 443
Information Technology 95 106 84 285
Materials 29 143 122 294
Telecommunication Services
12 35 52 99
Utilities 34 45 44 123
TOTAL 634 1,287 849 2,770
Developed + =
9
Understanding the Global Food Chain Allows Managers to Take Advantage of Existing and Emerging trendsHandset
Motorola
Sony/Eriksson
Nokia
Samsung
Phone Assembly
Elcoteq(Finland)
Compal(Taiwan)
BENQ(Taiwan)
Samsung(Korea)
Flextronix(Singapore)
Retailers
Best Buy(US)
Circuit City(US)
Radio Shack(US)
Carphone Warehouse
(Europe)
Chip Design
Silicon Labs(US)
RF Micro (US)
ST Micro (US)
Motorola (US)
Qualcomm (US)
Samsung(Korea)
DIAG SEMI (Finland)
ARM (UK)
Texas Inst. (US)
Chip Manufacturers
United MicroElec. (Taiwan)
TSMC(US)
IBM(Taiwan)
Texas Inst.(US)
Motorola(US)
Samsung(Korea)
Operators
Verizon
CingularATT Wireless
Sprint/Nextel
T Mobile
Vodaphone
China Mobile
SK Telecom
NTTDokomoJapan
HutchisonFoxconn(Taiwan)
10
YulonFord Otomotiv
Emerging Markets – 17
Hero Honda
DRB-Hicom Berhard
DongFeng
Denway
China Motor
Brilliance
Bajaj
Astra
Yamaha
Volkswagen
Toyota
Renault
Porsche HyundaiBMWFord
ProtonNissan
Maruti UdyogHonda
MahindraFiat
KiaDaimlerChryslerGM
Tofas
Tan ChongPeugeot
U.S. – 2 EAFE – 11
Buying the “Best of the Best”
11
Significant Sales Increases Due to
– Financing Availability
– Increased Purchasing Power of Chinese
– New Government Policies Supporting Car Ownership- Road building
Pursuing the “Best of the Best” Often Leads To Non-U.S. – In This Case, To China
Denway: A Producer Of Hondas In China
12
India Passenger Car Sales
Source: Citigroup India
Autos Case Study: Availability of Financing Increases Sales
As of 31-Dec-05
Automobile Financing Introduced
Rate Drops Below 20%
0
100
200
300
400
500
600
700
800
900
1000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Thou
sand
s
India Passenger Car Sales
13
Comparison of Chinese and US Autos as Percent of Population
Source: Morgan Stanley; FactSet As of 31-Dec-05
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,00019
0019
0519
1019
1519
2019
2519
3019
3519
4019
4519
5019
5519
6019
6519
7019
7519
8019
8519
9019
9520
0020
05E
Pas
seng
er A
utos
& T
ruck
s
0%
10%20%30%
40%50%
60%70%80%
90%
Pen
etra
tion
Rat
e of
Pas
seng
er A
utos
&
Tru
cks
US Total # Passenger Cars and Trucks on July 1 Chinese Cars
US Penetration Rate: Passenger Vehicles/Population Chinese Penetration Rate: Autos/Population
Experience in Developed Markets Allows Managers to Spot Trends in Emerging Economies
14
Comparison of the Pace of Chinese and US Passenger Vehicle Penetration
Source: Morgan Stanley; FactSet As of 31-Dec-05
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
1900
1902
1903
1905
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1920
1921
1923
US Passenger Vehicles
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
E
Chinese Cars
Experience in Developed Markets Allows Global Managers to Spot Trends in Emerging Economies
15
U.K. Mobile Phone Penetration 1985-2006
0%
20%
40%
60%
80%
100%
120%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Pen
etra
tion
Rat
e (%
)
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
Cell Phone Penetration Rate (Phones Per Capita) (Left Axis)Cell Phones (Right Axis)Vodafone Subscribers (Right Axis)Source: Citigroup Investment Research As of 31-Dec-05
Experience with Developed Markets Allows Global Managers to Spot Trends in Emerging Economies
16
China Mobile Price Chart 12/98 – 12/99
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
11/3
0/19
98
12/1
4/19
98
12/2
8/19
98
1/11
/199
9
1/25
/199
9
2/8/
1999
2/22
/199
9
3/8/
1999
3/22
/199
9
4/5/
1999
4/19
/199
9
5/3/
1999
5/17
/199
9
5/31
/199
9
6/14
/199
9
6/28
/199
9
7/12
/199
9
7/26
/199
9
8/9/
1999
8/23
/199
9
9/6/
1999
9/20
/199
9
10/4
/199
9
10/1
8/19
99
11/1
/199
9
11/1
5/19
99
11/2
9/19
99
Hong Kong $
Tariff Lowered
Experience with Developed Markets Allows Global Managers to Spot Trends in Emerging Economies
17
Developed Markets Benefit From Growth in Emerging Economies
Massive Demand For Energy in Developing EconomiesSupply of Light Sweet Crude Oil is InelasticLack of Global Oil Refining Capacity
2004/2005 Increasing Emerging Markets Demand for Energy/Oil Benefited US Oil Refiners
Leads to Much Higher Refining Margins for U.S. Complex Refineries.
18
Industriazed and Developing Oil Demand
Source: Oil Market Intelligence
Crude Oil Demand (Million Barrels Per Day 12 Month Average)
26283032343638404244
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Industrial*
Emerging**
* U.S., Western Europe and Japan.**Total excluding U.S., Western Europe and Japan
19
China: Crude Oil Demand Is Rising Quickly
0
1
2
3
4
5
6
7
8
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
Mill
inos
-Bar
rels
/Day
China Crude Oil Demand
Source: Oil Market Intelligence
20
Making Room for China: Oil Demand Growth Potential
Source: E.G. Edwards & Sons Energy Research / IEA EIA, U.S. Census Bureau
Per Capita Oil Demand, Barrels Per Year
0
5
10
15
20
25
30
35
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
E20
05E
United States
Japan
South Korea
China
Global Average
21
Increase in Sales and Margins Due to Increase in Global Demand for Their Products Straining Current Supply
Increase in Light Heavy Differential
Increase in Refining Margins
New Environmental Policies in US Effecting Diesel Fuel and Motor Gasoline
Benefiting From Global Trends
Valero: An Independent Petroleum Refiner That Owns and Operates Complex Refineries in the US
22
α EMF+α EAFE+α US>α Global
Expanded Opportunity Set
Leverage Knowledge Gained From Experience of Developed Markets
Exploit Beneficiaries of Emerging Market Trends Regardless of Company Domicile
Integrated Global Alpha is Greater Than the Sum of its Parts
23
Benefits of an Integrated Global Process
Nicholas-Applegate’s philosophy:
Academic research in behavioural finance indicates that investors react inefficiently to changing information
Nicholas-Applegate examine positive change as an indicator of out performance – change provides opportunity
Nicholas-Applegate’s approach:
To construct a globally integrated all country, all sector, all market cap portfolio using best ideas around the world
To leverage the extensive resources of Nicholas-Applegate’s research platform, both internal and external, fundamental and quantitative.
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CHANGE CREATES OPPORTUNITYCHANGE CREATES OPPORTUNITYNicholas-Applegate believes that stocks rarely remain fairly priced because of constantly changing information.
This investor behavior creates opportunity.
FundamentalsShare PriceMispricing Opportunity
TIME
AcceleratingFundamentals
DeceleratingFundamentals
SELL
BUY
Nicholas-Applegate Global Select philosophy: capitaliseon change
Academic research in behavioral finance indicates that investors react inefficiently to changing information
• investors tend to anchor on the past
• investors tend to be overconfident
This market inefficiency presents mispricingopportunities that Nicholas-Applegate capitalises on to earn excess return
Source: Nicholas-Applegate
25
Global Select: investment management approach
Nicholas-Applegate’s best stock picks around the world
Globally integrated process
All countries, all sectors, all caps over US$500 million
Includes emerging markets
Nicholas-Applegate’s investment approach combines focused fundamental research with globally integrated stock selection and portfolio construction. Global Select
Investment objective:— Excess return 3%-5%— Tracking error 4%-7%
Investment universe:— All markets, developed and
emerging— All capitalisation ranges— Approximately 4500 stocks
75-125 holdings
125%-200% turnover
Adding value through stock selection.
INVESTMENT APPROACH INVESTMENT APPROACH
Non actual past performance
Past performance for the Global Select capability is non-actual in that it is based on a composite of performance from discretionary mandates, mutual funds and sub-advisory accounts managed under the global select strategy.
Composite inception 01-Oct-97
26
* Composite inception 01-Oct-97Source: Nicholas-Applegate; see additional disclosure As of 30-Jun-06
Annualized Performance ($AUD)
22.0
16.3
1.4
16.3
21.7
14.3
-0.9
5.4
20.1
11.5
-2.3
3.5
-5
0
5
10
15
20
25
1 Year 3 Years 5 Years ITD*
%
Nicholas-Applegate Global Select*
MSCI ACWI Index
MSCI ACWI Growth Index
The Global Select Portfolio Has Produced Strong Returns Relative to the MSCI ACWI Since Inception.
27
Global Select ($ US): Risk-adjusted Results Global Select Has Delivered Top-Quartile Rankings.
* Composite inception 01-Oct-97; Source: Callan Associates Inc.; see additional disclosure As of 30-Jun-06
Returns For PeriodsEnding 30-Jun-06CAI Global Select StyleInception Date: 1-Oct-97
Last 3 Years Since ITDLast 5 YearsLast Year
0.0
5.0
10.0
15.0
20.0
25.0
A (33)A (21)
A (28)
A (1)B (38) B (32)
B (40)B (64)
11.2810.4021.5821.0610th Percentile
7.056.2917.0818.11Median
8.249.8318.6120.1125th Percentile
4.495.1616.1216.6475th Percentile
16.669.4120.3218.89NACM Global Select Comp.
15.20
18.28
3.903.5313.3090th Percentile
5.676.9218.59MSCI:AC World Free
28
Global Select ($ US): Peer Rankings
* Composite inception 01-Oct-97; Source: Callan Associates Inc.; see additional disclosure
Global Select Has Delivered Top-Quartile Rankings.
As of 30-Jun-06
0.430.7111.5216.66NACM Global Select Comp
1
1.52
691NACM Global Select Comp. Rank
0.180.257.05CAI:Intl EQ Global Sty Median
Sharpe RatioInformation RatioAlphaReturn
Since Inception Ending 30-Jun-06Portfolio Performance vs.MSCI:AC World Free Index
1=High 100=Low
(0.3)
(0.1)
0.1
0.3
0.5
0.7
0%
5%
10%
15%
29
Global Select ($ AUD): Market Participation
* Composite inception 01-Oct-97Source: Nicholas-Applegate; see additional disclosure
The Global Select Portfolio Has Produced Strong Returns Relative to the MSCI ACWI Since Inception.
As of 30-Jun-06
Market Participation ($AUD)
11.5
-6.8
6.5
-6.6
6.7
-7.7-10
-5
0
5
10
15
22 Up Quarters 13 Down Quarters
%
Nicholas-Applegate Global Select*MSCI ACWI IndexMSCI ACWI Growth Index
30
Why you should select Nicholas-Applegate
Philosophy focused on uncovering inefficiencies created by change
Dedicated, experienced global team
Globally integrated stock selection and portfolio construction
All caps, all regions … no barriers
Aims to deliver superior risk adjusted returns
The rationale for selecting Nicholas-Applegate
31
Your Questions
32
DisclosureThis report is intended to provide general advice and information only and has been prepared by Allianz Global Investors Australia Limited ABN 63 003 171 533 AFSL 244 322 (“AllianzGI”) without taking into account any particular person's objectives, financial situation or needs. Before acting on this general advice and information, you should consider the appropriateness of this general advice and information having regard to your personal objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
The information in this report, including any opinions, estimates or forecasts:
has been obtained from, or is based on, sources believed by us to be reliable
is not guaranteed as to accuracy or completeness
is given without obligation and on the understanding that any person who acts on it does so entirely at his or her own risk
constitutes our judgment and is subject to change without notice
may be based on proprietary research and is not to be relied on as advice
are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in this report.
Investments can go up and down in value. Past performance is not a reliable indicator of future performance.
Changes in rates of exchange may cause the value of investments to fluctuate.
33
Supplemental Information
Supplemental Information
34
Quality of Important Worldwide Crude Types
Source: Simmons & Company International
Bonny Light
1980
Brent
Mars
Maya
Arab Medium
Arab Heavy
Cabinda
Urals
Iran Heavy
Iran Light
Dubai
TapisWTI
Alaska North Slope (ANS)
1990
2000
2010Arab LightVenezuela Medium
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
20 25 30 35 40 45 50
SWEE
T
SULF
UR
CO
NTE
NT
S
OU
R
HEAVY API GRAVITY LIGHT
35
Basic Refining Concepts
Note: Degrees in FahrenheitSource: Simmons & Company International
36
Refineries Upgrade Crude Oil to Higher Value ProductsSource: Valero; EIA Refiner Production
Basic Refining Concepts
37
High Conversion: Coking/Resid Destruction
Source: Simmons & Company International
Complex Refineries Can Run Heavier and More Sour Crude While Achieving the Highest Light Product Yields and Volume Gain
38
Short 3,520,000 b/d of refined product - Primarily U.S. and AsiaCountry Refining Capacity and Consumption
Source: Oil and Gas Journal
Refining Capacity & Consumption by Country*
0
5
10
15
20
25
Uni
ted
Sta
tes
Rus
sia
Japa
n
Chi
na
Sout
h Ko
rea
Ger
man
y
Italy
Indi
a
Can
ada
Fran
ce
Bra
zil
Uni
ted
King
dom
Saud
i Ara
bia
Mex
ico
Iran
Sing
apor
e
Vene
zuel
a
Spa
in
Net
herla
nds
Taiw
an
Crude CapacityConsumption
$ (M)
*As of 04-Jan-06
39
Source: John S. Herold
Comparison of Sour Conversion Capacity
40
US Gulf Coast 3-2-1 Refining Margins 1995-2006
Source: ?
As of 31-Jan-06
$0.00$2.00$4.00$6.00$8.00
$10.00$12.00$14.00$16.00$18.00$20.00
Jan-9
5
Jan-9
6
Jan-9
7
Jan-9
8
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Gulf Coast 321
41
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