Q:  What is the investment philosophy behind the fund? A : We are long-only value international investors. Our belief is that value arises from the early recognition of investment opportunities. Over time, we have observed that the economy goes through cycles, and those companies without sustainable earnings may not have the ability to survive these cycles. That is why we continue to believe that investors should have a long-term perspective to generate sustainable returns. Q:  Can you define your investment strategy? A : The fund invests primarily in a diversified portfolio of publicly traded equity securities of companies located in emerging markets which we believe are undervalued. We invest the majority of the fund’s assets in securities of issuers located in emerging markets, with an investment horizon of three to five years. Our valuation methods focus on shares trading at the greatest discount to future earnings, together with cash flow and/or asset value projections. Q:  Would you describe your research process? A : It is a very collaborative process where HGI’s research team looks for value opportunities in all emerging market countries. We have significant local market expertise, which we complement with our global industry expertise. At HGI we have a dedicated emerging market management team composed of three senior members of our group. In addition, our fifteen member research staff group covers different industries around the world. Typically every analyst in the firm has at least one stock in his/her own coverage area that is included in the emerging market fund. All our analysts have dual responsibilities, which means that they have to cover both countries and sectors. In this way, the analyst is constantly looking for value opportunities not only in the countries covered, but also in the sectors. As part of the screening process, we look for value opportunities -stocks that are trading at a discount to their own history or peer group as well as searching for stocks that have been overlooked in the market and are out of favor. Additionally, we generate many ideas from company visits and conferences. This screening process narrows down the emerging markets universe of around 2,000 stocks spread across 27 countries to between 400 and 500 names. Then, we will focus in on a smaller number of that group, which is somewhere between 200 and 250 stocks. It is on this subset that we perform our due diligence and determine the long-term intrinsic value of stock. As we begin to construct our proprietary research for these companies, we will forecast five years out into the future. We will also construct all three financial statements—balance sheet, income statement, and cash flow, because we believe that the sell side may miss key cyclical points when they base their forecast only on two to three years. Once the intrinsic value of the stock is determined, the analyst then recommends that stock to the entire team at our weekly meeting. Prior to our weekly meetings, every analyst receives a copy of the report that the research analysts collaborating on the stock have put together. This usually consists of a copy of the proprietary worksheet that we use to present both historical information as well as forecasted information, and the valuation criteria that we are using to determine the value of the security. This is accompanied with other relevant information, such as the market float, share ownership, comparable peer group and most importantly, the buy and sell limit, as well as a write-up on the catalyst for researching the stock. During the meeting the entire analytical team asks various questions of the analyst presenting the idea and the idea is thoroughly vetted. Everyone in the firm has the responsibility to read the reports and to contribute with some input in that decision. Ultimately the responsibility to approve an idea rests on the shoulders of our Chief Investment Officers. Following the weekly research meeting, the Emerging Market portfolio management team implements the buy and sell decisions. A typical portfolio will consist of between 80 and 90 stocks. Q:  Can you illustrate with a few examples what kind of value you seek while investing in a company? A : The main criterion we use is the adjusted price-to-earnings ratio. That is the normal earnings power of a company through the cycle. Generally speaking we seek to identify companies that are trading at a low adjusted P/E and this multiple actually changes according to the industries. For instance, there are industries that have very high depreciation and amortization expenditures because of their acquisitive profile or because they are very high capital intensive type of industries, which carry higher multiples than others. These industries tend to have a lower earnings power or profile than those industries that may not have the same kind of non-cash deductions. As an example, while we would try to find banks that trade at less than five times the adjusted price-to-earnings, we may use a ten times adjusted price-to-earnings for software companies, media companies, or certain areas of the pharmaceutical industry. If we find a company where we estimate their peak earnings to be $10, and then we also assume it can make $5 in the trough of the cycle, we could very well estimate that the average earnings power through the cycle is $7.5 to $8 a share. If its stock is trading at $80, it has a ten times adjusted price-to-earnings. If this company is a bank, it may not be attractive, whereas if it is a media company or a brewer, it may be a lot more attractive. The average earnings for the cycle is determined using what we considered normalized factors. These affect the forecasting process. If for instance, we are looking at a very cyclical company such as an oil company, we will try to be as accurate as we can forecasting the price of oil in 2009 and 2010, but going past 2010 we will use mostly normalized assumptions for the price of oil and other key factors as inputs in the forecast. We will do the same for all oil companies that we follow in order to have a consistent view across the board. We complement this adjusted P/E with other criteria such as P/B, in case of industries that have heavy asset-utilization, or EV/EBITDA, when we are looking at companies with a short reporting history, or when short term earnings numbers are clouded by one-off charges and other issues that affect reported earnings. We assume that economic cycles have a duration of five years, and we see the macro situation of a country through the eyes of the company. For instance, if we are looking today at a company in Brazil, we will use the present macro conditions in our estimates of the company, that is, factors such as Gdp growth, interest rates, inflation and other important factors. As we make assumptions regarding future revenues and earnings, we will also use what we think are the normalized values for the same set of macro factors. If brazil’s GDP growth on a normalized basis is 4.5%, that means the growth of that company’s earnings in the following three years is likely to be higher than near term earnings, given the current economic conditions. It would not matter whether the cycle is growing this year or three years from now. In all our analysis we assume what is going to happen in the third, fourth, fifth year of the numbers that we forecast using normalized factors. Q:  What do you define as “opportunistic investments?” A : Our portfolio is an all cap portfolio, but with a large cap bias. We define opportunistic investments as those that are outside the benchmark or have a very small index weight. In the case of the emerging market portfolio there are twenty-one stocks at present that have a small index weight or are completely absent from the benchmark, so we consider these stocks to be “opportunistic investments.” Q:  How do you execute your portfolio construction process? A : Our portfolio construction process is a bottom-up, fundamental research process organized around country and sector diversification to manage risks. Generally, no single holding accounts for more than 5% of the portfolio, which will typically hold 80 to 90 issues in 25 to 30 countries. The benchmark for the fund is the mscI emerging markets Index. The combination of the large cap bias, our strong fundamental research and our disciplined use of guardrails tends to produce a high quality portfolio. Companies in the portfolio, typically have higher profitability than those in the benchmark, higher operating margins and higher returns on equity and assets, and we achieve this without paying more than what the index multiples. For example, when looking at a major oil or mining company in brazil or in Russia, we will focus on companies that have global leadership. We will have the belief that the company is still going to be around and thriving in the next five, ten and fifteen years, because in our opinion it is well managed, possesses a global quality resource base that it can extract competitively and it trades at an attractive multiple. However, in the same portfolio, we may also have a strong local telecom company in chile, or perhaps a growing supermarket chain in Africa, or a leading shoe retailer in china. All those companies are the kind of companies that we believe are going to be around in five, ten and fifteen years also. We are buying those companies almost exclusively based on our long-term focus. Q:  What are your risk control guidelines? A : We have several risk control guidelines which we use when we build and monitor the portfolio. These ensure that while stock selection may drive performance we also provide adequate diversification within the portfolio. We set up guardrails around the eight major countries of the mscI emerging markets Index and these ranges will generally go from 0.5 times to 1.5 times their index weight. These countries (china, korea, Taiwan and India in Asia, brazil and mexico in latin America, and russia and south Africa in the emeA region) account for 80% to 85% of the index weight. The remaining countries are a residual of stock selection. The portfolio is well diversified, with eighty to ninety securities, and the maximum position size is going to be typically 5% at cost. In terms of sector diversification, we also have guardrails around the ten sectors that make up the mscI emerging Markets Index. These ranges can be zero or 100% over some of the smaller sectors, but in terms of the six largest sectors, the range is typically between 0.5X and 1.5X the benchmark weight. We seek to be fully invested at all times. Cash is typically residual and it tends to be less than 5%. At the same time we do not employ currency hedging as we find it to be very expensive and many times unavailable in emerging economies.