Middle class expansion in emerging markets was presented. Key points included: 1) The emerging market middle class is projected to grow significantly over the next decade, surpassing developed markets, with an estimated $20 trillion in annual spending by 2020. 2) Emerging market consumption is growing rapidly, driven by the middle class, with China and India representing over 60% of the expected $6 trillion in additional consumption from 2010-2013. 3) Emerging markets are transitioning from low-cost exporters to domestic consumer markets, with China now the largest consumer market for automobiles, luxury goods, and internet users globally.

1. Middle Class Expansion in the
Emerging Markets
Presented by:
Rob Lutts, President & CIO
Tim Moore, CFA, Portfolio Manager
Dennis Wassung, CFA, Portfolio Manager

2. Presented by:
Robert T. Lutts, President & Chief Investment Officer
CHINA VS. UNITED STATES

3. United States versus China
TAX POLICY IN USA TAX POLICY IN CHINA
– U.S. corporate tax high – Very immature tax policy
– City, State and Federal – No real estate taxes
sales tax, capital gains, – Low corporate taxes
social security tax, – Low income taxes
dividend tax and more
– No social security tax,
– We are not undertaxed only modest obligations

4. United States versus China
US Debt Burdens China Government
Large and Growing Finances are Strong
• US has debt close to 90% of • Total government debt is
GDP much less than US – estimates
• Off balance sheet obligations around 40% of GDP
of Social Security and • Average Chinese citizen
healthcare could be larger avoids debt
than $14 trillion debt • Foreign Exchange Reserves
• US attitudes toward debt are are over $3 trillion
excessive • China has flexibility
• So, US debt could be 2X GDP

5. Incentives for Entrepreneurs are High
• High rewards and much wealth are there for those who
take risk in growing capital.
• Government policy encourages capital investment.
• Tax policy is favorable for investment.
• Infrastructure costs are low in China.
• Cost structure still very favorable for all businesses to
move operations to China. Two reasons:
1. Lower costs
2. Enlarge potential markets

6. China and Many Other Emerging Markets
Favorable for Capital Growth
• Over past ten years, Emerging Markets outperformed
developed markets by 10% per year.
• We anticipate this to continue once money comes back to
equity markets.
• China will eventually open up its currency, and this will
help China grow – fully convertible currency.
• China continues to take advantage of global
opportunities – buying in Brazil, Greece, and other
troubled areas.

7. Presented by:
Tim Moore, CFA, Portfolio Manager
EARLY INNINGS AND MYTHBUSTERS

8. Early Innings of Growth
• Young Stages of Urbanization & Localization of Brands,
Services, Products. Vast “Window of Opportunity” ahead.
• Middle Class = 2b people w/ $7 trillion annual spending
could reach $20 trillion in 2020 (2x that of US today).
• EM Population living in cities might grow +45% next 20
years.
• GDP growth of EM is 3x that of Developed Markets for 2011
& 2012 expectations (+6% vs 2%).
• Not just an “outsourcing” region anymore. They are
developing their own technology and innovating.

9. Myth versus Reality
Myths Reality
• It is a lot of people, but not • EM is 55% of world’s GDP
much economic growth growth and 45% of GDP but
• Only speculators or risky only 17% of World Mkt Cap
people invest there! • EM had record $95b inflow in
2010 for Equities
• Those countries have so
much debt! • EM has the least amount of
Debt/GDP of any region
• Their stocks do not perform
better than Developed • EM stocks outperformed US
(S&P 500) by 12%/year on
countries
average over last 10 years
• Currency is too volatile
• Broad basket of EM nations
reduces Currency Risk

10. “Catch-Up” Spending to
Accommodate the Middle Class
China is 60% of this $6 trillion expected spending 2010-2013

11. Broadening Offerings

12. What Else?
• Credit Cycle, Urbanization & Home Purchasing affects ALL
industries. “Halo Effect” lifts growth of Retail, Construction,
Energy Needs, Infrastructure, Banking, Healthcare.
• Multinational Companies only average 11% of sales
exposure to EM (highest are Nokia, Nike, Suzuki, Hyundai,
Boeing, Anheuser-Busch, Philip Morris Intl).
• Much better accounting practices & disclosures today.
• Supportive valuations of stocks along with dividends.
• Strong balance sheets and raising rates to curb inflation.

13. Presented by:
Dennis Wassung, Jr., CFA, Portfolio Manager
TRANSITION FROM “MADE IN CHINA”
TO “CONSUMED IN CHINA”

14. Emerging Markets Middle and Upper Class
to Surpass Developed Markets by 2015
6% of 2000 EM population,
growing to 22% in 2020

15. Emerging Markets Consumption is
Growing on a Global Scale

16. China and India Consumption Data

17. Consumption Spending
Breakdown

18. China’s Auto Market Is Now World’s Largest
10-Year Compound Growth
of 24% -- 2M to 18M units!

19. China Healthcare Industry
10-Year Compound Growth of ~16%
$350 5.0%
4.9%
$300
4.8%
$250 4.7%
4.6%
$200
4.5%
$150
4.4%
$100 4.3%
4.2%
$50
4.1%
$0 4.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China Healthcare Expenditures (US$, billions) % of GDP (RHS)

20. No Longer Just “Made in China”
• China is now estimated to be the world’s largest
consumer of luxury goods – with 22% share of
the 2010 global market @ $13 billion (overtaking
Japan)
• China’s Retail Sales of Consumer Goods growing
17% versus GDP growth of about 9.5%
• China’s Automobile Sales topped the U.S. in 2010,
becoming world’s largest car market
• World’s largest Internet user population, leading
to growing eCommerce industry