Alhuda CIBE - RIETs International Allocation Views

1. International Allocation Views
www.inginvestment.com
This month, we are raising our allocation to emerging
markets, to large-cap value stocks in the developed
markets, and to international REITs. Despite these moves
we are still underweighted in emerging market and large-
cap value stocks, though we are now up to neutral in
REITs.
• Volatility in the emerging markets has fallen recently, and
flows into emerging market equity mutual funds have
begun to stabilize, pointing to a more hospitable climate
for those markets. Accordingly, we are raising our
allocation to emerging market funds, though remaining
modestly underweighted. Enough uncertainty still exists
about the global outlook to warrant some caution.
• While we continue to favor growth stocks in the large-cap
universe, we are raising our allocation to international
value stocks. Our international fund managers are finding
some bargains among value stocks, and need to make
room to buy them by lightening up on growth stocks.
In July we added international real estate investment
trusts (REITs) as an asset class, with an initial
underweighting. This month we are moving our REIT
position to neutral. Moderate growth abroad and still-low
interest rates are favorable for REITs, and valuations are,
by some measures, still attractive in several markets. We
would like to have a substantial allocation to REITs for
diversification purposes and believe this is a reasonable
entry point.
October 20, 2006
For more information, please contact:
Brian Gendreau, Ph.D.
Investment Strategist
212.309.8276
brian.gendreau@inginvestment.com
Martin Jansen
Senior Portfolio Specialist
212.309.1796
martin.jansen@inginvestment.com
Volatility in the emerging markets has declined
since the May-June sell-off
This report does not make any recommendation about your investments, and this information should not be considered investment
advice. Any opinions expressed herein reflect our judgment at this date and are subject to change.
Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on
management's 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 such statements. Actual results, performance or events may
differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial
markets, (3) interest rate levels and (4) increasing levels of loan defaults.
0
10
20
30
40
12/31/99 6/20/2001 12/05/02 5/24/04 11/8/05
200
400
600
800
1000
% Dec 87 = 100
Index
30-day volatility and MSCI Emerging Market Free Index
V olat ilit y
Source: M SCI and ING IIM estimates
Current Positions
Recommended Change from
Neutral (%) Allocation Last Month
Large-Cap Developed Markets
EAFE core stocks 40 Overweight Unchanged
EAFE growth stocks 15 Overweight Reduced
EAFE value stocks 15 Underweight Unchanged
Total large-cap 70
Small-Cap Developed Markets
EAFE small-cap stocks 10 Underweight Reduced
Emerging Markets
Emerging market stocks 17 Underweight Raised
International Real Estate
International REITs 3 Neutral Raised

2. www.inginvestment.com
October 20, 2006Summary of Investment Decisions
Reducing our Defensive Position in International Equities
In late May, in the midst of a sharp, correlated downturn in
global equity and commodity markets, we moved to reduce risk
in our portfolios by underweighting developed-market small-
caps and the emerging markets. Although the markets have
rallied since then, we stayed underweighted in those asset
classes on a concern that they would underperform in a global
environment of decelerating growth and less liquidity. In recent
weeks, however, evidence has appeared that the global
slowdown is likely to be mild, and that global inflation may
remain under control. Moreover, valuations in the emerging
markets, which had been close to their all-time highs in May,
are now lower. In addition, volatility in the emerging markets
has subsided, flows into emerging market equity funds have
begun to stabilize – both good signs for future performance.
Taken together, these developments, in our view, warrant a
less defensive stance, which we have adopted by raising our
allocation to emerging markets, though not all the way up to our
fairly aggressive strategic neutral of 17% of the portfolio. Why
not a more aggressive stance? Because there is still some risk
that the global economy will decelerate by more than we
expect, possibly because central banks around the world are
not as close to being finished with their monetary tightening.
Raising our international REIT Allocation to Neutral
In July we added REITs to our international portfolios, but
underweighted them relative to their strategic neutral allocation
of 3%. We have long wanted to add REITs because their
return-risk performance has been attractive, and because
correlation of their returns with those on international equities
suggest material diversification benefits. We were reluctant to
add them at an overweighted or neutral weighting, however,
because most central banks around the world were still hiking
interest rates, which raised the prospect of a global downturn in
growth. REITs had outperformed international equities for over
five years, and we did not want to be buying near the peak.
Since then our concerns have abated. First, the Federal
Reserve has paused in its tightening, and in our view will be on
hold for several months. This means less upward pressure on
global interest rates as borrowers compete for funding
worldwide. Second, the global economy is showing signs of
resilience in the face of earlier evidence, such as a downturn in
leading indicators, that pointed to slower growth. Low interest
rates and moderate growth are favorable for REITs. While
REITs are trading at a premium to NAV in some markets, they
are trading at a discount in others. Taken together, these
considerations suggest that raising the allocation to REITs, to
neutral but not beyond, is appropriate. We have financed the
move to neutral by reducing our allocation to small caps, to
which REIT returns are highly correlated.
ROE in the emerging markets is below its peak,
but so are valuations
International REITs have outperformed stocks by a
wide margin
REITs are trading at a premium to NAV in some
markets but at a discount in others.
Please refer to important disclosures on the previous page.
0
100
200
300
400
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05
Source: S&P, Citigroup, and MSCI
S&P/Citigroup World ex. U.S.
REIT Index
MSCI All-Country ex. U.S.
World Index
Indices, Dec 95 = 100
1.0
1.4
1.8
2.2
2.6
D
ec-99
Aug-01
Apr-03
D
ec-04
Aug-06
10%
14%
18%
22%
26%ROE
P/B
Source: MSCI and I/B/E/S
-20
-10
0
10
20
30
40
Japan Europe Aus S'pore UK Japan HK
%
30%
22%
9%
0%
-10%
-13% -17%
Source: ING Clarion and UBS; 6/30/06
J-REITs
C-corps