International Investing PAS

International Investing
An Independent Advisor’s Guide
Our partner in developing this guidebook:

International Investing: An Independent Advisor’s Guide 3
Contents
Executive Summary...................................................................................................................................................5
Understanding International Opportunities........................................................................................................6
Investment Returns—United States versus International................................................................................................................. 6
Case Studies in International Investing.................................................................................................................................................. 8
Diversification Opportunities.................................................................................................................................................................. 10
Instrument Diversification Opportunities.............................................................................................................................................12
Returns and Correlations in International Diversification................................................................................................................14
Developed and Emerging Markets—Trends and Opportunities.....................................................................................................16
Accessing International Opportunities.............................................................................................................20
Indirect Investment.....................................................................................................................................................................................21
Depository Receipts..................................................................................................................................................................................28
Direct Investment.......................................................................................................................................................................................29
Getting Started........................................................................................................................................................ 34
Risks Related to International Investing ..............................................................................................................................................34
Leveraging Pershing for Direct Investment.........................................................................................................................................35
Appendices................................................................................................................................................................37
MSCI Market Definitions.........................................................................................................................................................................37
Methodology...............................................................................................................................................................................................37
About the Authors..................................................................................................................................................40

4 International Investing: An Independent Advisor’s Guide
Table of Exhibits
Exhibit 1: Real Returns of Equities and Bonds Internationally 1900–2007
Exhibit 2: Annual Total Returns (%) for U.S. Large Company, International and European Stocks
Exhibit 3: Comparison of Returns In Equities and Bonds Across Different Regions, 2003–2009
Exhibit 4: Risks and Returns of U.S. and Global Portfolios
Exhibit 5: HMC Asset Allocation 2009
Exhibit 6: CalPERS Actual Asset Allocation 2009
Exhibit 7: Number of Countries with Stock Exchanges
Exhibit 8: MSCI Country Categorization Framework
Exhibit 9: Establishment of Exchanges Over Time
Exhibit 10: Percentage of Financial Assets Within MSCI Category
Exhibit 11: Amount of Financial Assets Within MSCI Category
Exhibit 12: Percentage of Market Capitalization by GICS Sector
Exhibit 13: Factors Driving Risk and Return
Exhibit 14: Rolling 36-Month Correlation Between United States and Developed Markets, Emerging Markets
Exhibit 15: BRIC Index Versus G7 Index Monthly Performance Returns
Exhibit 16: Contribution to Global GDP Growth, PPP Basis
Exhibit 17: Emerging Markets with the Most Significant Moves in 2008 and 2009
Exhibit 18: Economic Forecasts Diverge over the Next Two Years
Exhibit 19: Real GDP Growth BRIC Versus United States
Exhibit 20: Projected Real GDP Growth BRIC Versus United States 2006–2015
Exhibit 21: Population and Wealth Comparison
Exhibit 22: Growth in Purchases in Foreign Securities by U.S. Investors
Exhibit 23: Number of International Fund and ETF Launches Per Year
Exhibit 24: Distribution of Pooled Funds by Type
Exhibit 25: Distribution of AUM by Type of International Index Mutual Fund
Exhibit 26: Distribution of AUM by ETF Type
Exhibit 27: Growth in International Investing Through ETFs
Exhibit 28: Distribution of AUM by Type of Actively Managed Mutual Funds
Exhibit 29: Summary Assessment of International ETF and Mutual Fund Options
Exhibit 30: Fees on Pooled Funds by Region
Exhibit 31: Depositary Receipts by Country Classification
Exhibit 32: Growth in Annual Depository Receipts Trading Volume
Exhibit 33: Developed Countries Direct Investment
Exhibit 34: BRIC Countries Direct Investment
Exhibit 35: Non-BRIC Emerging Countries Stock Exchanges

Executive Summary
Many investors today are considering the opportunities available to them through international
investing products. Globally, major institutional investors have always allocated a percentage of
assets to non-domestic instruments as a means to increase portfolio diversification, decrease risk
and improve overall investment performance.
In the United States, some of the most successful institutional investors have recently lowered the proportion
of U.S. equities in their overall portfolios while growing their investments in developed and emerging
markets. As well as investing in various geographical regions, these investors have also enhanced diversification
by investing in instruments other than equities, including expanded opportunities across different industry
sectors. Recent research from the International Monetary Fund (IMF) and others demonstrates the significant
growth potential in the years ahead in the emerging markets of Brazil, Russia, India and China versus the
developed economies of the United States, Europe and Japan.
Traditionally, larger institutional investors have utilized a direct investment approach in international
investing by buying and selling shares on local stock exchanges. For smaller institutional investors, indirect
investing via pooled vehicles such as mutual funds and exchange-traded funds (ETFs) has traditionally been
a more economical approach. ETFs have become an increasingly popular way to gain exposure to these
markets; ETFs based on international indices have been some of the most popular products in recent years.
However, these products focus primarily on the large-cap equities of international markets, and therefore can
provide only limited portfolio diversification opportunities.
A direct investment approach via the purchase of tradable instruments on local stock exchanges allows for
more flexibility in an investment portfolio and can also provide access to a wider range of international
instruments such as international bonds. This approach provides the ability to control underlying securities,
which an ETF or mutual fund strategy does not, and mitigates the management and maintenance fees
associated with these indirect investment vehicles.
Another vehicle for investors to consider is the depositary receipt, which gives investors the option of
investing directly in the shares of a limited number of foreign companies (as opposed to using a pooled fund)
in U.S. dollars and using U.S. standard settlement processes.
While international investing carries currency, liquidity, political and other unique risks, partnering with a
service provider can facilitate the mitigation of these complicating factors. The right service provider can offer
a complete range of trading facilities and operational support, with access to assets across multiple investment
markets and features such as multicurrency support and reporting. Beyond operational infrastructure, firms
can leverage a service provider’s local market knowledge and expertise on legal and risk management issues,
thereby increasing investor confidence.

Understanding International Opportunities
Major institutional investors have long invested in international markets with the expectation that those assets
will increase diversification in their portfolios, reduce overall risk and improve investment returns. Diversifying
into different geographical regions and instruments has typically enabled these investors to see better investment
performance than if they had remained solely invested in U.S. assets.
Investment Returns—United States versus International
Various studies through the years have compared investment returns in the United States versus international
markets. For example, in 2006, the London Business School completed a study of investment performance
across 17 major markets, for which data was available going back to 1900. Its findings show that the United
States ranked fourth in terms of market returns. The best performers in terms of equities were Australia and
Sweden, both of which had an annualized percentage real return of 7.6% compared with a global average of
5.7%. Exhibit 1 below shows the findings of an updated joint study between ABN AMRO and the London
Business School, which found that the United States had annualized returns of 6.5% for equities and 1.9% for
bonds, whereas Australia and Sweden still held strong at 7.9% and 7.8%, respectively, in the equity market.
Exhibit 1: Real Returns of Equities and Bonds Internationally 1900–2007
Belgium
Italy
Germany
France
Norway
Spain
Japan
Switzerland
Ireland
Denmark
Netherlands
United Kingdom
Canada
United States
South Africa
Sweden
Australia
0 2 4 6 8-2
Source: ABN AMRO/LBS Global Investment Returns Yearbook 2008
Equities Bonds
A 2008 study from Ibbotson Associates provides a similar story: $1 invested in 1969 in international stocks
was worth $64.03 in 2007; for U.S. stocks, the same $1 was worth $54.05. Exhibit 2 shows the annual total
returns of U.S. large company stocks compared to international stocks and European stocks from 1970 to
2007. Investment returns for U.S. stocks have lagged behind international and European stock performance
since 2002.

Exhibit 2: Annual Total Returns (%) for U.S. Large Company, International and European Stocks
Source: Ibbotson Stocks, Bonds, Bills, Inﬂation 2008 Classic Yearbook
U.S. Large Company stocks International stocks European stocks
100
80
60
40
20
0
-20
-40
1970 20071974 1982 1998199019861978 20021994
Another element of the international equation is that performance can be substantially enhanced through the
inclusion of other international instruments, which can help to increase returns and lower risk.
Exhibit 3 shows a comparison of returns in equities and bonds in a subset of key markets. The Sharpe ratio
has been added, which measures the return received on the instrument versus the risk taken (as measured by
the volatility of the instrument’s returns). The higher the Sharpe ratio, the better the returns are for each unit
of risk. As can be seen in Exhibit 3, returns across asset classes have been lowest in the United States and
higher in both the other developed economies and the emerging markets. In terms of the Sharpe ratio, bonds
have performed better than equities in the last five years across all markets.
Exhibit 3: Comparison of Returns in Equities and Bonds Across Different Regions, 2003–2009
Source: Capco analysis (please see Appendices for methodology and calculations)
Equities Bonds Sharpe ratio
All World United States Emerging
Markets
World (excluding
United States)
4.5%
6.4%
1.2%
5.2%
7.7%
8.5%
15.8%
9.5%
0.24 0.95
1.2
0.38 0.73 0.73 0.93
0.06

Constructing sample world portfolios illustrates this more clearly. Exhibit 4 shows two portfolios: P1, which
represents U.S.-only equity and fixed income and P2, which represents a global portfolio with both U.S. and
international equity and international fixed income.
Exhibit 4: Risks and Returns of U.S. and Global Portfolios
Comparison of risk and return proﬁle of a U.S. balanced
portfolio with a portfolio composed of U.S. and emerging markets
Source: Capco analysis (please see Appendices for methodology and calculations)
Risk (annualized standard deviation using
monthly returns) October 2003 – September 2009
Return(annualizedcompounded
returnusingmonthlyreturns)
October2003–September2009
P2
8%
6%
4%
2%
0%
7% 8% 9%
United States
and Emerging Markets (EM)
P1United States only
Portfolio Composition
P1 U.S. only portfolio:
U.S. Equities 60%
U.S. Bonds 40%
P2 U.S. and EM portfolio:
U.S. Equities 48%
U.S. Bonds 32%
EM Equities 12%
EM Bonds 8%
The sample illustrates that the U.S.-only portfolio, P1, has both lower returns, as well as higher risk than the
global portfolio. Between the two portfolios, P2, which has an international mix of both equities and bonds,
has a higher return with lower risk.
Case Studies in International Investing
Some of the world’s leading institutional investors provide effective case studies for the benefits of international
diversification. Investors such as Harvard Management Company (HMC) and California Public Employees’
Retirement System (CalPERS) achieved in fiscal year 2008 significant returns of 8.6% and -2.4%, respectively;
these are particularly impressive returns given that stocks were down over 10% in the same period. HMC had a
relatively low investment in domestic equities and CalPERS showed a high percentage in international equities.
HMC is an investment management company responsible for managing the $26 billion endowment of
Harvard University. In fiscal year 2009, HMC increased its asset allocation in emerging market equity from
10% to 11%. Developed foreign market equity remained relatively stable, comprising 11% of the asset
allocation, further indicating its commitment and confidence in investing internationally. In fiscal year 2008,
emerging markets (7.6%) outperformed the benchmark (4.8%), while foreign bonds (21.3%) also
outperformed the benchmark (18.5%).
For fiscal year 2009, the endowment experienced a -27.3% rate of return; the annualized five-, ten-, and
twenty-year performances have outperformed the benchmark, demonstrating that the recent year is a
performance anomaly. HMC reports that the five-year annualized return is 6.2%, and the twenty-year
annualized return is nearly twice as strong at 11.7%, further showing that performance has been positive
during the long term.

Cash
3%
Absolute Return
18%
Real Assets
26%
Fixed Income
13%
Private Equity
13%
Emerging Markets
Equity 11%
Developed Foreign
Markets Equity
11%
Domestic Equity
11%
Exhibit 5: HMC Asset Allocation 2009
Source: Harvard Management Company
CalPERS is the largest defined benefits pension plan in the United States, with $180.9 billion in assets under
management as of June 30, 2009. Although its asset value declined by 23.4% in the last year, CalPERS
continues to show a strong long-run twenty-year performance, with a positive return of 7.75%.
The June 2009 target asset allocation of foreign equity of 24.5% was consistent with that of the previous year,
a further indication of confidence in the international markets. As shown in Exhibit 6, the actual allocation in
international equity exceeds the targeted percentage. Moreover, CalPERS raised its alternative investment
target in anticipation that the private equity market will bring about higher future returns.
Exhibit 6: CalPERS Actual Asset Allocation 2009
Source: CalPERS July 31, 2009
Inﬂation Linked
3%Real Estate
9%
Private Equity
11%
International Equity
26% Domestic Equity
26%
Global Fixed Income
24%
Cash
1%
The above examples from HMC and CalPERS demonstrate that international diversification has been a key
component driving institutional investors’ investment returns. Importantly, this has included diversification
into different geographical regions, instruments and sectors.

Diversification Opportunities
Geographic Diversification
Political changes in the past twenty years have dramatically increased the number of countries available for
investment. Up until the fall of the Berlin Wall in 1989, the number of stock exchanges globally had remained
constant for decades. After the Wall fell, that number grew dramatically, more than doubling in two decades.
A 2007 Capco study presented a top-down analysis of the growth in exchanges at the country level.1
The
study used the International Standards Organization (ISO) list of 244 countries, of which the World Bank
had population and economic statistics for 2009. The findings from the study showed that in 1988, stock
exchanges existed in 63, or 26%, of the 244 countries. These countries comprised 58% of global population
and 81% of global gross domestic product (GDP, measured on the purchasing power parity [PPP] basis).
By 2005, there were national or regional stock exchanges present in 145, or 59%, of ISO-listed countries, which
together comprised 92% of the world’s population and 99% of global GDP (on a PPP basis). Another four
countries were planning to add exchanges at the time of the study: Libya, Cambodia, Sierra Leone and Gibraltar.
Exhibit 7: Number of Countries With Stock Exchanges
Source: Capco Analysis 2007
NumberNew
160
140
120
100
80
60
40
20
0
158517921808185018611869187518811890189419121929195319601969197519811986199019931996199920022005
Cumulative
Year
12
10
8
6
4
2
0
The remaining 95 ISO countries constitute only 1% of global GDP. There were 65 countries with
population counts that ranged from approximately 20,000 in Palau to 73 million in Ethiopia. The bulk of
these, approximately 50 countries, had populations under 10 million. The remaining 30 countries were small
islands with limited or no population. In summary, the study concluded that institutional and legal
frameworks and infrastructure for stock trading had been established in virtually all of the world’s significant
economies at that point.
This is significant in terms of assessing these countries from an investment perspective as long-term potential
growth opportunities. As the World Economic Forum states, “Stock market liquidity is statistically significant
in terms of its positive impact on capital accumulation, productivity growth and current and future rates of
economic growth. More generally, economic theory suggests that stock markets encourage long-run growth
1
See page 37 for Methodology.

by promoting specialization, acquiring and disseminating information and mobilizing savings in a more
efficient way to promote investment. Research also shows that as countries become richer, stock markets
become more active and efficient relative to banks. Bond markets have received little empirical attention, but
recent research has shown that bond market development does in fact affect economic output.” (World
Economic Forum Financial Development Report, 2008).
With so many investment options available, institutional investors have relied on various global investment
frameworks and performance benchmarks to select in which countries to invest, set asset allocation strategies
and evaluate their relative performance. One of the most common sets of frameworks and benchmarks for
global investing is the Morgan Stanley Capital International (MSCI, now MSCI Barra) index. MSCI has
developed frameworks for categorization of global economies, as well as stock market indices for multiple
countries and assets.
Exhibit 8: MSCI Country Categorization Framework
Economy Region Countries
Developed Markets
North America – Canada – United States
Europe
– Austria
– Belgium
– Denmark
– Finland
– France
– Germany
– Greece
– Ireland
– Italy
– Netherlands
– Norway
– Portugal
– Spain
– Sweden
– Switzerland
– United Kingdom
Pacific
– Australia
– Hong Kong
– Japan
– New Zealand
– Singapore
Emerging Markets
Latin America
– Argentina
– Brazil
– Chile
– Colombia
– Mexico
– Peru
Europe, Middle East
and Africa
– Czech Republic
– Egypt
– Hungary
– Israel
– Jordan
– Morocco
– Poland
– Russia
– South Africa
– Turkey
Emerging Asia
– China
– India
– Indonesia
– Korea
– Malaysia
– Pakistan
– Philippines
– Taiwan
– Thailand
Frontier Markets
Central and
Eastern Europe and
Commonwealth of
Independent States
– Bulgaria
– Croatia
– Estonia
– Kazakhstan
– Lithuania
– Romania
– Serbia
– Slovenia
– Ukraine
Africa
– Kenya
– Mauritius
– Nigeria
– Tunisia
Middle East
– Lebanon
– Bahrain
– Kuwait
– Oman
– Qatar
– Saudi Arabia
– United Arab Emirates
Asia – Sri Lanka – Vietnam
Source: Morgan Stanley Capital International Index
The MSCI framework used to differentiate the various investment markets available applies a set list of
criteria to classify countries, primarily World Bank net income per capita, size and liquidity of corporate
listings available, as well as market accessibility. (See Appendix 5.1 for details.) With this framework, MSCI
has classified economies and their performance indices into three major tiers: Developed, Emerging and
Frontier. The Developed Index series started in 1969, the Emerging Index in 1988, and the Frontier Index in
2007. The major indices in use today for benchmarking global investment performance are the World Indices

(all developed markets), EAFE (Europe, Australasia and the Far East, or the developed markets excluding the
United States and Canada), Emerging Markets, the All-Country World Index (which is the combination of
all the developed and emerging markets), and the frontier markets.
Combined, the countries in all three categories together represent only 68 of the 145 investable countries
available. In terms of GDP and population, however, they represent 95% of global GDP and 80% of
population, with the developed and emerging markets alone (48 countries) comprising the bulk of global
economic activity: 92% of GDP and 73% of population.
Over time, it is likely that frontier and other less-developed countries with exchanges will contribute a larger
percentage to global GDP as their economies grow and mature. When the Emerging Markets Indices were
first launched in 1988, they comprised less than 1% of total global stock market capitalization; by 2007, they
were 11% of this total.
The chart below shows the relative age of the exchanges, demonstrating that the majority of frontier and
fledgling countries have only recently launched exchanges.2
As their economies grow and mature, these
countries should begin to contribute more to global GDP growth, similar to the path taken by the emerging
market countries.
Exhibit 9: Establishment of Exchanges Over Time
Source: Capco Analysis 2007
NumberofExchangesOpenedperYear
12
10
8
6
4
2
0
2007
Year
Developed Emerging Frontier Fledgling
1770179218081850
186118691875188118901894
19121929195319601969197519811986199019931996199920022005
Instrument Diversification Opportunities
As previously noted, diversifying across international instruments enhances investment performance by
reducing risk and increasing returns. According to the World Federation of Exchanges, there were
approximately more than 46,000 listed equities available globally and more than 140,000 listed bonds in
2008. On an over-the-counter basis, there are many more fixed income and derivative instruments available.
2
‘Fledgling countries’ are countries with stock exchanges that are not officially part of the MSCI Frontier Index.

In terms of the value of the assets available, total assets across the three MSCI segments were approximately
$140 trillion in 2007.3
Equities were approximately $62 trillion and fixed income (public and private) was
approximately $76 trillion.
The developed markets still represent the majority of global assets, at 83% of the total. They also have a
balanced mix of equity, private debt and public debt available for investment.
Emerging markets are approximately 16% of total assets, and frontier markets represent 1% of total assets.
In these sectors, equities are still the dominant vehicle, at approximately 70% and 78% of total investable
assets, respectively; but there are fixed income opportunities in each of these sectors, as well.
Exhibit 10: Percentage of Financial Assets Within MSCI Category
Source: Financial Development Report 2009, World Economic Forum
Equity Securities Private Debt Secutities Public Debt Securities
Developed Markets Frontier MarketsEmerging Markets
100%
80%
60%
40%
20%
0%
Exhibit 11: Amount of Financial Assets Within MSCI Category ($ Billions)
Source: Financial Development Report 2009, World Economic Forum
Equity Securities
Private Debt Secutities
Public Debt Securities
Developed Markets Frontier Markets TotalEmerging Markets
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
$45,616.80 $15,720.00 $1,215.50 $62,552.30
$46,274.70 $2,467.20 $102.50 48,844.40
$23,334.10 $4,161.90 $238.60 $27,734.60
3
Financial Development Report 2009, World Economic Forum. Not all countries represented in sample: Developed = 20/23; Emerging = 23/25; Frontier = 8/22.

Sector Diversification
Another element to consider is the amount of sector diversification available in developed and emerging
markets. The Global Industry Classification Standard (GICS) categorizes companies into ten investment
sectors. As the chart below shows, emerging markets have investable companies in all ten, but they are more
weighted towards materials (commodities) and energy than are the developed markets, which reflects their
economic growth patterns. For example, in emerging markets, energy and materials are 31% of total market
capitalization versus 15.7% in developed markets. Conversely, the consumer and health segments are much
more dominant in developed markets, 28.1% of total, than in emerging markets, where they represent only
11.5%. For investors focused on sector-based investment themes, expanding the opportunity set to include
relevant companies in emerging markets should be considered.
Exhibit 12: Percentage of Market Capitalization by GICS Sector
Percentage of GICS Sector Total
Source: Emerging Markets: A 20-Year Perspective, MSCI 2008
Developed Emerging
Health
Utilities
Consumer Staples
Consumer Discretionary
Industrials
Telecommunication
Information Technology
Materials
Energy
Financials
9.0%
1.6%
4.6%
3.3%
8.4%
4.8%
10.7%
5.1%
10.2%
8.4%
4.7%
9.7%
10.1%
13.2%
6.2%
14.3%
9.5%
16.7%
26.8%
22.8%
Returns and Correlations in International Diversification
What Drives Returns in International Investing?
The preceding sections outline diversification opportunities across geographical regions, instruments and
sectors or industries. A fourth variable, style (value, growth, etc.), is also relevant depending on the investment
strategy. For investors, an important question must be what component of this diversification drives the risk
and return from the investment. A study undertaken by MSCI Barra decomposed the drivers of risk and
return into three fundamental criteria: country factors (risk and return due to local conditions, including
currency), industry and sector factors (risk and return of a company belonging to a particular industrial
segment) and style factors (risk and return of a company belonging to a particular style). MSCI’s analysis
showed that for the developing countries, represented here by EAFE, risk and return was almost equally due
to country and industry factors, and less so for style. For the emerging markets, the majority of risk and
return was due to country factors.

Developed Markets (EAFE)
Source: The World Is Not Enough?, MSCI Barra Research, July 2008
Style Share of Global Component
Country Share of Global Component Industry Share of Global Component
Exhibit 13: Factors Driving Risk and Return
100%
80%
60%
40%
20%
0%
Feb 99 Apr 07Feb 01 Apr 05Mar 03
Cross-SectionalVolatility
12-MonthMovingAverage
Emerging Markets
Style Share of Global Component
Country Share of Global Component Industry Share of Global Component
100%
80%
60%
40%
20%
0%
Feb 99 Apr 07Feb 01 Apr 05Mar 03
Cross-SectionalVolatility
12-MonthMovingAverage
The Diversification Benefits of Correlation
One of the primary benefits of international diversification is to enable investors to invest in assets whose risk and
return profiles are driven by different factors—as one asset drops, another may be rising. However, the correlation
of assets in different countries has been increasing in recent years, meaning that diversifying internationally appears
to have decreased the opportunity for non-correlated returns.

Exhibit 14: Rolling 36-Month Correlation Between
United States and Developed Markets, Emerging Markets
DM-EMUSA-EAFE USA-EM
100%
80%
60%
40%
20%
0%
Dec90Dec91
Dec07
Dec93Dec94Dec95Dec96Dec97Dec98Dec99Dec00
Dec02Dec03Dec04Dec05Dec06
Dec01However, as Exhibit 14 above shows, correlation between markets has not always been a straight-line
phenomenon, but instead is cyclical and marked by ups and downs. Taking the USA–Emerging Market (USA-
EM) series as an example (orange line in Exhibit 14 above), the correlation between the two peaked in 1993 at
approximately 65%; two years later, correlation had been approximately halved to 30%. Similarly, in 2004,
correlation for the series was approximately 80%; three years later it had dropped to approximately 60%.
As expected, the overall trend for the past decade has been up on an absolute basis; however, on a relative basis,
there are still periods of decreasing correlation, which have benefited investors with internationally diversified
portfolios. As long as there is a relative difference in the performance of U.S. and non-U.S. markets, (correlation
remaining below 100%), the benefits of diversification will still exist.
Developed and Emerging Markets—Trends and Opportunities
From 2003 to 2007, the global economy boomed for a sustained period. Global GDP rose at an average of
approximately 5% a year, its highest sustained rate since the early 1970s. About three quarters of this growth
was attributable to a broad-based surge in the emerging and developed economies.4
Events since the summer
of 2007 and through 2009 have significantly altered the global economic and investing landscape.
The economic crisis has had a significant impact on the global economy, especially in the emerging markets
that suffered a sharp reduction or redemption in capital flows because of the desire for capital protection.
Despite a 39% fall in the MSCI Emerging Markets Index, the emerging markets have grown by 93%
(Compound Annual Growth Rate [CAGR]) starting from 2003, as compared to the S&P 500®, which has
grown by only 6.5%. Thus, although the credit crisis and the subsequent events of 2008 have caused short-
term volatility and declines in emerging markets, long-term attractiveness remains.
4
World Economic Outlook, International Monetary Fund, October 2008.

Exhibit 15 compares monthly index performance returns for Brazil, Russia, India and China (BRIC) and G7
indices on a basis points measurement. The graph indicates that the emerging markets BRIC countries
rebounded faster than the G7 countries since January 2009, which further shows that BRIC have been quick
to recover from the downturn compared to the developed nations. During September 30, 2009, the BRIC
Index returned 2.55%, which was more than double that of the G7 Index, which had a 1.02% return. Even
during the lowest monthly return in February 2009, the BRIC Index had nearly double the returns of the G7
nations at 1.37% and 0.70%, respectively. The single-year annualized return, as of September 30, 2009, for
the BRIC Index was 18.85%, while the G7 Index showed a -6.83% annualized return for the last year.
Exhibit 15: BRIC Index Versus G7 Index Monthly Performance Returns
Source: MSCI.com Index Performance, October 2009
BRIC
G7
400
300
200
100
60
Sep 04 Sep 09Sep 06 Sep 08Sep 07Sep 05
BasisPoints
In the years ahead, global growth will depend more on the emerging markets than the developed markets.
Exhibit 16 shows that the United States has seen its share of global GDP slowly decrease from 1995 to 2009,
while emerging countries, such as China, continue to grow.
Exhibit 16: Contribution to Global GDP Growth, PPP Basis
Source: IMF
USA Other Advanced Economies China Rest of the World
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-04 2005-09
100%
80%
60%
40%
20%
0%
ContributionPercentage

Key Emerging Economies
The BRICs
Of the emerging markets, the global focus has been on Brazil, Russia, India and China, also known as the
BRIC economies. This was a phrase coined by Goldman Sachs in 2002 to refer to the nations that it
highlighted as most likely to become forces in the global economy. A combination of a large population, a
shift to a more capitalist orientation and access to natural resources has fostered the rapid growth in BRIC
countries, making them economically attractive and thus an area of high attention. There remain other
countries that are exhibiting rapid growth, such as Poland, South Africa and Oman, though they do not yet
currently possess the combination of factors described above. Most of the BRIC countries have rebounded
rapidly during the start of 2009.
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
ContributionPercentage
Exhibit 17: Emerging Markets With the Most Signiﬁcant Moves in 2008 and 2009
Russia India Turkey Hungary Brazil Russia Chile Indonesia Brazil India
Countries with Biggest
Declines in 2008
Countries with Strongest
Recoveries in the First
Half of 2009
Source: An Update on Emerging Markets, MSCI Barra Research, September 2009
Exhibit 18: Economic Forecasts Diverge Over the Next Two Years
Source: IMF Forecasts (2008) for 2009-1010
8%
6%
4%
2%
0%
-2%
-4%
-6%
ForecastGDPGrowth
(Average2009-1010Change)
Brazil China India Russia France Germany Hong Kong Singapore U.K. U.S.
Moreover, BRIC countries are shown to have stronger and more positive GDP growth predictions than some
developed countries. By 2040, the BRIC countries are forecasted to overtake the G7 nations in terms of
GDP. As these economies grow, domestic wealth is created at a fast pace. For example, over the next ten years
the growth in the middle classes of these countries is expected to be 400%. Within the next five years, there
will be more high-net-worth individuals in China and India than in the United Kingdom. By 2025, Russia is
expected to have a higher GDP per capita than the United Kingdom.

Exhibit 19: Real GDP Growth BRIC Versus United States
Source: IMF, October 2009
15%
12%
9%
6%
3%
0%
-3%
-6%
-9%
-12%
-15%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2008
2007
PercentageofGrowth
China India Russia Brazil United States
As demonstrated in Exhibit 19, the rate of GDP growth in the United States has decreased or remained
relatively stable, whereas the rate of GDP growth by BRIC countries has shown a higher increase year over year.
Exhibit 20 illustrates the projected real GDP growth rate from 2015 to 2020 for BRIC countries compared to
the United States. The BRIC average growth rate is 4.6%, which is more than double the projected U.S.
growth rate over five years.
Exhibit 20: Projected Real GDP Growth BRIC Versus United States 2015-2020
Source: IMF
India China Brazil Russia U.S.
6%
5%
4%
3%
2%
1%
0%
AveragePercentageYearoverYear
BRIC Average 4.6%
U.S. 2.1%

Even with growth in the BRIC countries, it is likely that the United States will remain the dominant economy
for the foreseeable future. The population base of the United States is only third in size behind China and India,
and its economy and financial markets remain the largest in the world. However, India and China specifically
have demonstrated consistent high growth in GDP and in GDP per capita. China will likely become the second
largest economy by 2020.
Exhibit 21: Population and Wealth Comparison
Source: IMF October 2009
Emerging MarketsDeveloped Markets Frontier Markets
2009 Population (Million)
Size of Bubble Represents GDP (Measured in USD with Current Exchange Rate 2009)
Russia
Brazil
Germany
United
States
Japan
India
China
140012001000800600400200-200 0
25%
20%
15%
10%
5%
0%
-5%
Argentina
U.K.
GDPGrowthRate
Accessing International Opportunities
Non-institutional investors now have an increasing range of investment options in international markets,
enabling them to capitalize on opportunities historically limited to institutional investors. The two main
approaches can be categorized at a high level as direct and indirect investing.
Indirect investing via pooled funds, including mutual funds, and ETFs allows investors to gain exposure
primarily to the equity capital markets of developed and emerging markets. Direct investing into international
markets includes investing in tradable instruments on local stock exchanges or over the counter through a
broker-dealer.

U.S. investor demand for foreign stocks and bonds has increased during the past several years, and pooled
funds have been one of the primary means for investing abroad because they provide an economical way of
accessing these markets. In 2007, U.S. residents purchased $252 billion in foreign stocks and bonds, and
mutual funds and ETFs accounted for most of those purchases (Exhibit 22).
Exhibit 22: Growth in Purchases in Foreign Securities by United States Investors
Source: Fact Book 2008, Investment Company Institute
Mutual Funds ETFs Non-Fund
2003 2004 2005 2006 2007
200
150
100
50
0
Billions($)
Indirect Investment
Pooled Funds
Mutual funds fall into two major categories: index and active. Index mutual funds are typically constructed
to simply mirror an investment index such as the S&P 500 or MSCI EAFE. These are usually referred to as
passive investment vehicles as the underlying stocks in the portfolio are only changed when there are changes
to the underlying constituent stocks in the index. Actively managed mutual funds are funds that are actively
traded according to the investment strategy of the portfolio manager, and stocks in the portfolio are actively
traded as needed to meet investment objectives.
ETFs are similar to index mutual funds in that they are constructed to mirror indices, but they are listed on
stock exchanges and so are tradable intraday, as opposed to mutual funds, which are only bought and sold at
end-of-day prices.

Exhibit 23 demonstrates the overall growth of international pooled funds in the U.S. in terms of the number
of launches of actively managed funds, index funds and ETFs. After a lull in the growth rate during the 1990s,
2005 saw a significant increase in the number of new fund launches, catering to an increasing appetite for
international investment.
Exhibit 23: Number of International Fund and ETF Launches per Year
Source: Morningstar Research
Active Index ETF
150
120
90
60
30
0
NumberofLaunches
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2008
2007
1953
1954
1956
1962
1959
1970
1973
1974
1976
1978
1979
1980
1981
1982
1984
1985
1986
1987
1988
1989
1990
1001
1992
1983
Among the three types of international funds, active funds (managed by portfolio managers based on views
of anticipated favorable business conditions in an industry or interest rate movements affecting a specific asset
class) are the largest, with total assets under management (AUM) of approximately $974 billion. ETFs are
approximately $200 billion and index funds are approximately $118 billion. In terms of the numbers of
funds, there are approximately 829 actively managed funds, 153 ETFs and 56 index funds.
Exhibit 24: Distribution of Pooled Funds by Type
Number and Percentage of Funds by Fund Type
(Total = 1038)
AUM and AUM Percentage of Funds by Fund Type
(Total = $1.3 trillion)
Index 56, 5%
ETF 153, 15%
Active 829, 75%
Index $118 billion, 10%
ETF $200 billion, 15%
Active $974 billion, 75%

Index Mutual Funds
Currently, index funds represent the smallest international opportunity set; only approximately 42 funds with
less than $100 billion in AUM are available for investment.5
As the chart below shows, 76% of the funds are
focused on developed markets, primarily international large-cap stocks. Offerings for emerging markets funds
exist, but a review of the underlying holdings shows that they have more than 25% of their assets in non-
emerging markets, and so they represent a blend of developed and emerging assets.
Developed $89.5 billion, 76%
Exhibit 25: Distribution of AUM by Type of International Index Mutual Fund
AUM and Percentage of Index Funds by Fund Type
(Total = $118 Billion)
Developed/Emerging Blend $1.4 billion, 1%
Global $26.8 billion, 23%
Expense ratios for these funds range from 3 to 300 basis points, with an average of approximately 84 basis
points. Fees for the top ten funds, however, range from 3 to 112 basis points, with an average of 29 basis points.
ETFs
ETFs were initially developed as an alternative to index mutual funds, which investors can only buy and sell
once per day after the underlying assets have been priced at the end of the trading session. Similar to index
mutual funds, ETFs typically track a stock index, but are listed on exchanges, and so they can be traded on
an intra-day basis like a stock.
Since their inception, the market for ETFs has grown tremendously. ETFs provide investors with the flexibility
to make more precise asset allocation decisions than index funds, typically with lower expense ratios.
5
Source: Morningstar Research. See Appendix for a detailed description of the fund categorizatoin methodology for this section.

Currently, there are over 150 funds with total AUM of approximately $200 billion (Exhibit 26). ETFs are
available for specific country and regional indices in both the developed and emerging sectors, giving an
investor the ability to pursue a global strategy in a number of different markets.
Exhibit 26: Distribution of AUM by ETF Type
AUM and Percentage of ETF Funds by Fund Type
Developed/Emerging Blend $19.5 billion, 10%Global $3.8 billion, 2%
Emerging $86.6 billion, 43%
In 2008, the slower growth of ETF assets reflected the overall market movement, but there is still evidence for
future growth according to the overall trend in Exhibit 27. Although the ETF net asset share of international
ETFs grew only at a rate of 22% in 2008, these shares have increased from 3% to 30% between 2000 and
2007, supporting the view that investors are looking more favorably upon diversifying their portfolios
through indirect investments in the international markets via ETFs.
Whereas many other investment vehicles, such as hedge funds and mutual funds, faced net outflows in 2008,
ETFs grew at a steady rate with a net inflow of approximately $177 billion. Investor interest in global and
international ETFs continues to remain strong and, according to the Investment Company Institute (ICI),
between 2004 and 2008, international and global ETFs issued approximately $142 billion net in new shares.
Expense ratios for developed ETFs range from 23 to 108 basis points; for emerging ETFs, from 16 to 98
basis points. The overall average is around 57 basis points.
Expense ratios for the top ten developed ETFs range from 11 to 52 basis points, and for the top ten emerging
ETFs, from 20 to 72 basis points.
Exhibit 27: Growth in International Investing Through ETFs
Source: Investment Company Institute
% Other ETF % Global/International ETF
Years
100%
80%
60%
40%
20%
0%
1996 200820072006200520042003200220012000199919981997

Actively Managed Mutual Funds
Actively managed funds have the longest track record in international investing, with the first fund launched
in 1953 by DWS, followed by Templeton in 1954. Currently, there are approximately 829 funds with
approximately $974 billion in AUM.
Exhibit 28: Distribution of AUM by Type of Actively Managed Mutual Funds
AUM and Percentage of Active Funds by Fund Style
Developed/Emerging Blend $286.6 billion, 29%
Global $158.9 billion, 16%
Emerging $17.8 billion, 2%
In terms of the breadth of choice, funds in developed markets offer a much wider range based on regions,
countries, styles (value versus growth) and industry sectors. While many are labeled “emerging,” a review of
their underlying holdings indicates a blend of developed and emerging assets.
For actively managed international funds, the expense ratio had a relatively broad range, from 18 basis points
to over 330 basis points, with an average of 133. Indeed, expense ratios for the top ten funds range from 47
to 128 basis points, highlighting the need for an investor to carefully balance any perceived potential upside
with associated costs.
Summary
Both international ETF and international mutual fund instruments can provide the required exposure to take
advantage of potential growth and diversification opportunities, though there are factors relevant to each
instrument that should be considered. Exhibit 29 highlights the key attributes of both ETFs and mutual
funds as they pertain to investment costs and investor control, as well as showing which investor profiles
might be best suited to each strategy.

Exhibit 29: Summary Assessment of International ETF and Mutual Fund Options
Investment
Option
Fees Customization Control Recommended Investor Profile
International ETFs – Lower fees as ETFs are
traded as stock
– More tax effective since
ETFs do not constantly
buy and sell shares
and capital gains tax is
minimized
– No back-end fees or
penalties incurred on
redemptions
– No control of underlying
stock or bond portfolio
– Variety of international
ETFs, including broad-
based and regional ETFs,
single-country, developed
markets, emerging markets
and global sector ETFs
– No rebalancing option
– No active management
– Shorter investment horizon
– Interest in short-term trading
– Desire for higher liquidity
– Desire for greater diversification
and potentially higher returns
– Low interest in following the
markets and managing portfolios
– Infrequent trading, whereas
frequent trading may result in high
transaction costs and tax liability
– Smaller initial investments, and no
minimum investments on most ETFs
– Taxable accounts benefit from tax
advantages of ETFs
– More complex trading techniques
for savvy investors, such as short
sales and stop loss and limit orders
International
Mutual Funds
– Relatively higher fees, for
example load fees
– Foreign taxes
– Sales charges, annual fees
and other expenses
– Wide choice of mutual
fund types, including
international, regional,
country and global sector
funds
– Limited ability to weight
industry segments
– Dollar cost averaging
possible
– Automatic dividend
reinvestment possible
– No control over capital
gains tax
– No control over dividend
cycles
– Longer investment horizon
– Desire for more active
management of funds
– Desire for greater diversification
and potentially higher returns
– Desire to regularly invest small
amounts and lower trading costs
involved
– Smaller investors with limited funds
seeking to avoid commission fees
– More frequent traders and fewer
transaction fees assessed
Costs
ETFs are generally less expensive than index and actively managed mutual funds, particularly in international
investments. Unlike mutual funds, they also do not require a minimum investment. However, investing in
markets that are potentially more volatile has been more problematic for ETFs than active mutual funds, as
they do not have the ability to select and rebalance investments in times of crisis.
Actively managed mutual funds have the highest expense ratios due to the additional costs incurred in
evaluating overseas companies. Mutual funds typically charge front-end or back-end loads on top of the
management fees. Some international mutual funds also impose a two-month redemption fee on sales in an
attempt to reduce short-term arbitrage trading, which might seek to take advantage of time zone differentials
in opening and closing price levels. Tax-managed funds also may impose redemption fees as a means of
discouraging shareholder turnover. Typically, however, back-end fees or penalties are not assessed on
redemptions in ETFs.

Exhibit 30: Fees on Pooled Funds by Region
Fees for International Pooled Funds—Lows and Highs by Fund Style
Active ETF Index
Developing/Emerging
HighLow HighLow
Developed
HighLow
Global
HighLow
Emerging
BasisPpoints
0
50
100
150
200
250
300
350
Flexibility
ETFs provide investors the opportunity to exploit daily short-term movements in the market by allowing
intraday trading, and to take advantage of newly established trends. Investors in mutual funds are restricted
to trading once a day. One benefit that mutual funds seem to have over ETFs is the flexibility of dollar cost
averaging. It might be more costly to trade frequently in ETFs, as a commission is charged for each transaction.
ETFs and mutual funds can also differ in the treatment of dividends. While mutual funds give investors the
flexibility to automatically reinvest dividends, investors in ETFs must explicitly control how dividends are
handled. A decision to reinvest dividends may result in transaction fees, though some brokers allow reinvestment
of dividends at no additional cost. In addition, some older ETFs are structured as unit investment trusts (UITs).
The delay in reinvesting dividends in UITs can have a negative effect on total returns. In UITs, dividends are
held in an interest-bearing account until the end of each quarter before being reinvested. In contrast, a mutual
fund may reinvest dividends daily.
Risks
Unlike mutual funds, ETFs are traded on stock exchanges. The intraday pricing characteristic of ETFs results
in transactions that are priced at market value, rather than end-of-day net asset value (NAV). This can work
in favor of the investor when the ETF is bought at a discount to the underlying securities, but may adversely
impact the investor when bought at a premium. In thinly traded, volatile markets, the bid or ask spread of an
ETF may widen, which may result in investors buying at a premium to the portfolio’s value, or conversely,
selling at a discount. Transactions in mutual funds, however, are priced once a day at the fund’s closing price,
which prevents investors from taking advantage of intraday price movements.

The positions held by ETFs are more transparent as they always align with major indices. This makes asset
allocation across an investor’s entire portfolio easier to achieve as all the underlying instruments are known.
A mutual fund might only release its holdings on a quarterly basis or less frequently, making it difficult to
ascertain the underlying securities and the exposure to each. Unlike actively managed mutual funds, ETFs
that track a particular underlying market segment may allow investors to execute a strategy more effectively
as these investment vehicles remain true to their stated objectives.
Depository Receipts
Investors have the option of investing directly in the shares of a foreign company (as opposed to using a pooled
fund) in U.S. dollars and using U.S. standard settlement processes via the use of depository receipts (DRs).
DRs are negotiable certificates issued by a U.S. bank representing shares of a foreign stock, with the price
of the DR relating directly to the price of the foreign stock in its home market. The issuing broker manages
both the tracking to the local share price and any currency movements, for which a fee is charged. DRs are
transacted in the same way as domestic securities in terms of clearance, settlement, transfer and ownership.
As Exhibit 31 shows, a significant number of companies from developed, emerging and frontier countries
have used this method to raise capital and develop a liquid market for their shares in the United States. The
majority of them are large-cap firms, with some mid-cap companies also taking advantage of the DR market
to access capital.
Exhibit 31: Depositary Receipts by Country Classiﬁcation
Total = 3,110
Source: BNY Mellon, 2009
Emerging 1,482, 48%
Developed 1,482, 48%
Fledgling 52, 2%
Frontier 141, 5%
The demand for international investing has been driving growth in the DR market with total investments
in DRs totaling more than $1.2 trillion in March 2008, a 36% increase from 2007. Exhibit 32 shows the
increase in DR trading volume as a whole, with a record $4.4 trillion in trading volume in 2008. DR issuers
from BRIC countries dominated the market, accounting for over 50% of the trading volume.

Exhibit 32: Growth in Annual Depository Receipt Trading Volume
Source: BNY Mellon
1999 200220012001 2003 2004 2005 2006 2007 2008
5,000
4,000
3,000
2,000
1,000
0
TradingVolume(Billions$)
The ability to invest in a foreign company as in a domestic company enables DR investors to avoid the costs
and risks of investing directly in local markets. Currency fluctuations, costs for local custodian settlement,
safekeeping charges and foreign taxes on transactions are eliminated. Dividends are also paid in U.S. dollars,
providing a greater level of transparency to these transactions.
There are different types of DRs. Some are unlisted and trade as over-the-counter stocks, while others are
listed on the New York Stock Exchange (NYSE) or NASDAQ and so are registered with the U.S. Securities
and Exchange Commission (SEC) and required to adhere to GAAP accounting and reporting principles.
Lastly, for institutional investors, Rule 144A6
and Regulation S7
securities are available. These typically private
placements are reserved for qualified institutional buyers (QIBs), who are described as sophisticated investors
who understand the risks of investing in these instruments.
Fees for investing in DRs are limited to the fees charged by the issuing broker to either perform the initial
conversion or to simply buy the DR shares from another existing investor. Typically, once there is a liquid
market, about 95% of trading is done between investors, rather than issuing new shares. Standard domestic
custody and safekeeping fees also apply. Building an internationally diverse portfolio from DRs would require
an evaluation of the intended investment strategy and the required cost and effort compared to simply
investing in a pooled fund.
Direct Investment
Investing via mutual funds, ETFs and DRs allows investors to gain exposure primarily to the equity capital
markets of developed and emerging markets, whereas direct investing via the purchase of tradable instruments
on local stock exchanges offers investors a greater number of options.
All the international markets in the MSCI Developed Markets and MSCI Emerging Markets indices have existing
stock exchanges and most allow foreign investors to purchase securities and deal locally on those exchanges.
6
Rule 144a is an SEC rule that modifies a two-year holding period requirement on privately placed securities to allow institutional buyers to trade those positions
among themselves, substantially increasing the liquidity of the related securities.
7
Regulation S has been amended to bring its concepts more in line with Rule 144, with the objective of reducing fradulent practices in offshore offerings of equity securities.

Direct Investing in Developed Markets
Other than the United States, the Japanese and European capital markets are the most developed in the
world. Many developed countries have more than one stock exchange and offer numerous tradable
instruments, including equities, warrants, options, bonds, derivatives, unit trusts, commodities, rights, indices,
futures and debentures. Exhibit 33 below shows a partial listing of stock exchanges, along with some of the
risks and country-specific rules and regulations that investors should consider.
Exhibit 33: Developed Countries Direct Investment
Country Exchange Type Exchange Name Details/Comments
France Primary Stock
Euronext (Does not
include NYSE Euronext)
Tax
– Investors pay a flat 16% capital gains tax
– Dividends paid to non-residents are subject to a 25%
withholdings tax
Ease of entry
– According to the U.S. State Department, the formal French
investment regime remains the least restrictive in the world
United Kingdom
Primary Stock London Stock Exchange Tax
– A 20% withholding tax applies to dividends paid
to foreigners by REITs
– Interest income paid
Ease of entry
– The United Kingdom does not discriminate between
UK nationals and foreign investors except in a few
exceptional circumstances
Futures/Options/
Derivatives
EDX London
ICE Futures Europe
The Baltic Exchange
London Metals
Exchange
Germany
Primary Stock Deutsche Börse AG Tax
– All dividends distributed to foreign investors (non-
residents) are also subject to the flat withholding tax of
25%
Ease of entry
– German law offers foreign investors national treatment
Futures/Options/
Derivatives
RMX Hannover
Commodities
European Energy
Exchange
Japan
Primary Stock
Osaka Stock Exchange
Tax
– Dividends distributed to foreign investors are subject
to a withholding tax of 20%
– Interest distributed to foreigners is subject to a
withholding tax of 20%
– Investors are taxed on gains from the sale of shares at
20% (however, through December 2008, this rate is 10%)
Ease of entry
– Japan maintains no formal restrictions on inward
portfolio investment
Tokyo Stock Exchange
Futures/Options/
Derivatives
Kansai Commodities
Exchange
Tokyo Commodity
Exchange
Tokyo Financial
Exchange
Futures/Options/
Derivatives/
Commodities
Central Japan
Commodity Exchange
Canada
Primary Stock/ Futures/
Options/Derivatives/
Commodities
TSX Group
Tax
– Dividends paid to foreign investors are subject to a 25% tax
– Interest paid to non-residents is subject to a 25% tax
Ease of entry
– Canada offers full national treatment to foreign investors

Direct Investing in the BRIC Markets
The BRIC countries offer equities, derivatives, commodities and other instruments to local investors. Many of
these instruments are not available via mutual funds or ETFs. As Exhibit 34 illustrates, there is significant
liquidity, but also some country-specific risks.
Exhibit 34: BRIC Countries Direct Investment
Brazil
Primary Stock/ Futures/
Options/Derivatives
BMF Bovespa (On
May 8, 2008, the Brazil
Mercantile Futures
Exchange merged with
the São Paulo exchange
to create the BMF
Bovespa exchange)
Tax
– Investors pay 15% capital gains tax
– Interest paid to foreign investors is subject to a 15% tax
Ease of entry
– Foreign investors are required to maintain a presence or
appoint a representative broker or institution
– The past closure of stock exchanges due to market
volatility raises questions on liquidity risk
Russia Primary Stock
RTS Stock Exchange
Tax
– Foreign investors pay a 30% capital gains tax and a 15%
income tax on dividends
– Foreign investors pay a 20% tax on interest income
– A 13% tax is levied on the sale of shares
– The past closure of stock exchanges due to market
volatility raises questions on liquidity risks
Ease of entry
– Investing in Russia is difficult for foreign investors due
to the lax and shifting regulatory environment. Laws and
regulations are often murky
– A new law passed in March 2008 limits foreign
investments in certain industries deemed to be of
strategic significance by Russia’s parliament
Moscow Interbank
Currency Exchange
India
Primary Stock
Bombay Stock Exchange
Tax
– Foreign investors pay a 30% short-term capital gains tax
and a 10% long-term capital gains tax
– A 10% tax rate is levied on interest income received
Ease of entry
– Foreign investors investing in India must register with the
Securities and Exchange Board of India (SEBI)
– India has caps in place on the quantity of shares foreigners
can own and these vary by sector and type of investing
instrument
National Stock Exchange
Commodities
Multi Commodity
Exchange
China
Primary Stock
Shanghai Stock
Exchange
Tax
– There are no capital gains taxes
– A 10% witholding tax is levied on dividend income for
foreign investors
– Foreigners pay a 10% tax on interest income received—
however, for residents of Hong Kong this is reduced to 7%
Ease of entry
– A changing regulatory environment can prove to be
challenging for foreign investors
– A limit on foreign investors purchase of locally traded
instruments is strictly enforced using a quota system
Shenzhen Stock
Exchange
Futures/Options/
Derivatives
Chinese Gold and Silver
Exchange
Dalian Commodity
Exchange
Zhengzhou Commodity
Exchange
Shanghai Futures
Exchange

Direct Investing in Other Emerging Markets
With an improved investment climate, international investors are increasingly becoming interested in other
emerging markets that are showing positive GDP growth. Exhibit 35 shows a selection of these countries.
Although they have less liquidity than the BRIC countries, these developing markets offer foreign investors
opportunities to invest locally in stock markets and, in some cases, in derivatives and futures instruments.
Exhibit 35: Non-BRIC Emerging Countries Stock Exchanges
Mexico
Primary Stock
Bolsa Mexicana de
Valores
Tax
– Interest paid to foreigners is subject to a withholding tax
rate of 4.9%
– There are no dividend taxes
Ease of entry
– Mexico is open to foreign direct investment (FDI) in most
economic sectors and has consistently been one of the
largest recipients of FDI among emerging markets
Futures/Options/
Derivatives
Mexican Derivatives
Exchange
Turkey
Primary Stock Istanbul Stock Exchange
Tax
– Dividends paid to non-residents are subject to 15%
withholding tax
– A 10% interest income tax is assessed on foreign investors
– Capital gains derived from the sale of securities are
subject to income taxes subject to a detailed schedule of
holding periods
Ease of entry
– According to the U.S. State Department, Turkey has one of
the most liberal legal regimes for investment in the OECD
– However an excessive bureaucracy, a slow judicial system,
high taxes lead to a highly inefficient legal and regulatory
environment
Commodities Istanbul Gold Exchange
Malaysia
Primary Stock Bursa Malaysia
Tax
– No taxes are assessed on dividend income
– A withholding tax of 15% applied to non-residents on all
interest income
– There are no capital gains taxes
Ease of entry
– According to a World Bank survey Malaysia ranks third
in protecting investors—both local and foreign
– Malaysia limits foreign investors’ participation in the
financial services sector
Futures/Options/
Derivatives
Bursa Malaysia
Derivatives
Chile Primary Stock
Bolsa de Comercio de
Santiago
Tax
– All interest is subject to a 35% holding tax
Ease of entry
– Credit is allocated on market terms and is available to
foreigners, although the Central Bank does reserve the
right to restrict foreign investors’ access to internal credit
if a credit shortage exists

Costs
Costs for investing usually include brokerage commission and custodian fees for the settlement and
safekeeping of assets in local markets. Portfolio accounting and administration costs are typically charged by
custodians. Costs vary among markets and providers. Institutions frequently use a sliding scale arrangement
in which costs decline as assets or trade volume increase.
For an international institutional investor, four major types of fees are charged when investing locally.
AUM or portfolio-based fees are typically charged in basis points:
1. Asset safekeeping charges
2. Portfolio accounting and administration charges
Transaction fees are charged per trade, which can be charged either as a straight fee or in basis points:
3. Brokerage commissions
4. Settlement transaction charges
Asset safekeeping charges vary widely among countries. These charges are typically the lowest in the United
States, where fees are usually under 1 basis point per annum. Safekeeping fees in Europe are typically higher
due to the fragmented nature and complexity of the post-trade infrastructure in the region. Fees in emerging
and frontier countries are even higher, in some cases over 50 basis points. So for a $1 billion portfolio,
charges for a U.S.-only portfolio could be under $100,000 per year or they could be over $5 million for a
portfolio that is 100% allocated to emerging and frontier assets.
Charges for portfolio or fund accounting and administration are usually much more standardized, regardless
of the asset type in the portfolio. These typically range from 2 to 10 basis points, depending on the amount
of services required.
With brokerage commissions, the United States is the least expensive, while international commissions are
substantially higher. Elkins-McSherry, a transaction cost analysis provider, estimates average costs for U.S.
trades at 8.46 basis points, 18.30 basis points for European Union trades and a global average of 22 basis
points. These costs include commissions plus local taxes and fees.
Settlement transaction fees are also market specific, with the developed markets significantly less expensive
than emerging or frontier markets.
Flexibility
For international investors considering direct investing, a cost/benefit analysis should be undertaken to
determine whether direct investing is economically viable, or whether investment in pooled funds or DRs
would be more effective. A direct investing approach provides greater flexibility in an investment portfolio, as
well as access to a greater range of international instruments than those covered by mutual funds and ETFs,
which tend to be heavily weighted towards equities.
Direct investing requires the investor to leverage service providers for international access to both developed
and emerging global markets.

Risks
The increase in the number of local tradable assets is counterbalanced by the risk of direct investing. For
example, investors in foreign markets are subject to local laws and regulations regarding capital adequacy,
tax payment and profits repatriation. In addition to these regulatory challenges, foreign investors must also
manage potentially adverse foreign exchange and local interest rate risks for fixed income investments. While
these risks bear an upside potential, they could also significantly harm foreign investors if mismanaged.
A number of developed and emerging markets have treaties with one another to prevent double taxation of
their citizens who may be investing abroad. These treaties vary by country, investor class and tax type. Direct
foreign investors should be familiar with tax treaties of countries in which they intend to invest as the tax
relief they receive could boost their investment returns.
A direct investor in international markets, particularly in emerging market countries, may see potentially
greater returns, but could also face a range of risk profiles that do not exist in most developed markets. The
inability to buy or sell based on investor preference, such as liquidity risk, is a key consideration. Liquidity
risks are significantly higher in emerging markets predominantly due to the relative immaturity of these
capital markets. In addition, there can be more restrictions on order types. For example, the short selling of
securities in China is prohibited, which would inhibit the execution of some investing strategies. Also, the
lack of robust derivatives markets in emerging markets may hamper investors who want to hedge their
investments locally.
However, this situation is changing. For example, the combination of Brazil’s futures and equities
exchanges—the BMF and Bovespa merger in May 2008—should significantly improve the synergies and
volumes of the futures, options, derivatives and equity markets in Brazil. Both local and foreign investors
will be able to access most markets on the same platform and exchange, and the expected increase in trading
volume will help reduce the liquidity risk of the Brazilian capital markets.
Getting Started
International investing carries risks that are unique to international markets, necessitating an evaluation of
areas such as currency, liquidity and political and economic risks. A service provider helps to mitigate these
risks by providing critical research and specialist support in managing these areas.
Risks Related to International Investing
Investors must consider a number of risks before constructing an international portfolio. Risks are dictated,
in part, by the geographical scope of the investment: a broad international portfolio; a more limited portfolio
focused on either emerging markets or developed markets; and a portfolio focused on a specific region, such as
Europe or Latin America, or a specific country or countries. The profile of the international portfolio informs
the risk evaluation.
Currency Risk—Foreign investment returns depend on both the local currency exchange rate value against
the U.S. dollar and the stock price of the local currency.
Liquidity Risk—The typically lower trading volumes in international markets, as compared to the United
States, and the fact that a number of developing countries allow foreign investors to purchase only a limited
quantity of specified classes of securities, reduce the liquidity of these markets.

Political and Economic Risk—Political events have the potential to destabilize returns from foreign markets.
Particularly in emerging markets, macroeconomic conditions remain relatively volatile with historical policy
changes such as currency controls, taxation changes and trade restrictions negatively affecting foreign investors.
In addition to these fundamental risk considerations, investors must also consider informational issues.
Obtaining financial information on specific foreign companies may be problematic since accounting and
financial disclosure practices can vary widely from U.S. standards.
Leveraging Pershing for Direct Investment
Investing directly in foreign markets via the purchase of tradable instruments on local stock exchanges
typically requires a relationship with a local broker-dealer. Pershing offers efficient access to a breadth of local
brokers in various international markets, and investors can leverage these relationships when trading.
Leveraging Pershing for Direct Investment
Sophisticated services:
Direct access
Preliminary services:
Indirect access
No International
access
InternationalCapabilities
Pershing
Other major service providers
Regional players
Maturity
Pershing is a leader in the direct investment market and provides a complete suite of services:
Global execution capabilities for equities, fixed income and derivatives
Multicurrency support, thus offering execution capabilities in non-U.S. dollars along with foreign
exchange solutions
Global custodian capabilities with connectivity to various industry utilities and international depositories
Transparent and flexible reporting with multicurrency statements
International algorithmic trading (including TWAP, VWAP, implementation shortfall and percentage
of volume)
Dedicated support 24 hours a day, 6 days a week, with a single point of contact
International access through American Depositary Receipts (ADRs)
Pershing also provides a robust technology infrastructure, which includes straight-through-processing capabilities (in
markets where permissible), and seamless integration capabilities with various third-party solutions and applications.

One-Stop Shop
Pershing gives independent advisors a competitive edge in meeting growing investor demand for international
portfolio diversification.
Pershing can help you manage the additional complexities and risks related to international investing with
a true one-stop shop. Pershing offers a complete range of trading, operational support and diverse investment
options across different geographical regions and provide local market knowledge and expertise around
potentially complex regulations and legal challenges including risk management. In addition, Pershing
provides a consultative relationship by offering education and support for dynamic regulations such as
alterations in the access of different types of vehicles and changes in the investment landscape, especially
in the emerging economies.
A partnership with Pershing provides registered investment advisors (RIAs) with more transparency into the
international investment process. RIAs who identify investment opportunities early and redirect investments
appropriately will benefit from Pershing’s extensive capabilities and support.
Movement from Global Investment Banks
Pershing meets the needs of independent firms who increasingly desire pure-play custody and brokerage
services. These firms look to providers who have a strong balance sheet and are less exposed to the effects of
the credit crisis. This era of financial transformation creates a unique opportunity to form stronger strategic
partnerships. By not directly competing with an investment firm’s business and by not taking positions in the
firm’s transactions, Pershing offers a relatively low-risk and high-reward proposition, thus ensuring reliability
and safety for the investment firm.
When evaluating a provider, consider Pershing’s comprehensive services and robust infrastructure. Add to
those Pershing’s strong industry reputation, leading track record and a growing customer base, and you will
find Pershing a natural choice as your firm’s strategic partner for international investments.

Appendices
MSCI Market Definitions
Criteria Frontier Emerging Developed
A. Economic Development
A.1 Sustainability of economic development No requirement No requirement
Country GNI per capita 25% above the
World Bank high income threshold* for
3 consecutive years
B. Size and Liquidity Requirements
B.1 Number of companies meeting the
following standard index criteria
2 3 5
Company size (full market cap)** USD 434 mm USD 857 mm USD 1,734 mm
Security size (float market cap)** USD 34 mm USD 434 mm USD 857 mm
Security liquidity 2.5% ATVR*** 15% ATVR 20% ATVR
C. Market Accessibility Criteria
C.1 Openness to foreign ownership At least some Significant Very high
C.2 Ease of capital inflows/outflows At least partial Significant Very high
C.3 Efficiency of the operational framework Modest Good and tested Very high
C.4 Stability of institutional framework Modest Modest Very high
* High income threshold for 2007: GNI per capita of USD 11,456 (World Bank, Atals method).
** Minimum in use for the May 2008 Semi-Annual Index Reviews, updated on a semi-annual basis.
*** Annual Traded Value Ratio (ATVR)
Methodology
Description of the methodologies used to develop analytical charts.
Section 2
Footnote 1: In addition to stock exchanges, there has also been high growth in the number of fixed income
and derivatives exchanges. For the purposes of this study, fixed income and derivatives-only exchanges were
excluded. Many of the stock exchanges included in this study listed and traded multiple instrument types, but
all traded common shares at a minimum.
Exhibit 3: Comparison of Returns in Equities and Bonds Across Different Regions, 2003–2009
Equity indices – MSCI – Return is a six-year compounded return.
Bond indices – Citi (Solomon) – Return is a six-year compounded return.
EM includes BRIC and other EM Asian countries, Latin America and Eastern Europe.
Sharpe ratio is calculated using a five-year compounded return and a 2% risk-free rate.
Monthly indices used to derive the return, standard deviation and correlations include the following:
– MSCI All World index used as a proxy for all world equities
– MSCI USA Standard Core index used as a proxy for U.S. equities
– MSCI EM Standard Core index used as a proxy for emerging markets equities

– MSCI World, excluding U.S. Standard Core index, used as a proxy for world (excluding U.S.) equities
– Citigroup World Broad Investment Grade index used as a proxy for all world bonds
– Citigroup U.S. Broad Investment Grade index used as a proxy for U.S. bonds
– Citigroup Europe Broad Investment Grade index used as a proxy for world (excluding U.S.) bonds
– Citigroup Emerging Markets Broad Investment index used as a proxy for emerging markets bonds
Exhibit 4: Returns of U.S. and International Portfolios
All returns are compounded annualized returns for October 2003 to September 2009, and all standard
deviations are annualized from monthly standard deviations.
Portfolio 1: U.S.-only portfolio represents a U.S. balanced portfolio with weights in U.S. equities at 60%
and bonds at 40%.
Portfolio 2: U.S. and emerging market portfolio represents a balanced portfolio with emerging markets
investments both in equities and bonds (U.S. equities at 48%, U.S. bonds at 32%, EM equities at 12%
and EM bonds at 8%).
Monthly indices that were used to derive the return, standard deviation and correlations include the following:
– MSCI All World Index used as a proxy for all world equities
– MSCI USA Standard Core index used as proxy for U.S. equities
– MSCI EM Standard Core index used as a proxy for emerging markets equities
– MSCI World (excluding U.S. Standard Core index) used as a proxy for World (excluding U.S.) equities
– Citigroup World Broad Investment Grade index used as a proxy for all world bonds
– Citigroup U.S. Broad Investment Grade index used as a proxy for U.S. bonds
– Citigroup Europe Broad Investment Grade index used as a proxy for world (excluding U.S.) bonds
– Citigroup Emerging Markets Broad Investment index used as a proxy for emerging markets bonds
Section 3
The data on funds and ETFs was extracted from Morningstar’s website database on October 7, 2009.
For international index funds, the criteria includes the following:
– Percentage of non-U.S. stock greater than 50
– Either index or enhanced index funds
– Total assets greater than or equal to $1 million
– A distinct portfolio
For international active funds, the criteria includes the following:
– Percentage of non-U.S. stock greater than 50
– No index or enhanced index funds
– Total assets greater than or equal to $1 million
– A distinct portfolio

From that point, the following scheme was followed to categorize the vehicles for the charts in the paper.
Fund/ETF Category
U.S.
(Asset%)
International Developed
(Asset%)
Emerging
(Asset%)
Global 25% 0–75% 0–75%
International Developed 0–25% 75% 0–25%
International Emerging 0–25% 0–25% 75%
International Developed/Emerging Blend 0–25% 0–74% 0–74%
For those vehicles with no data on holdings available (approximately 20%), the Morningstar category and
fund name were used as proxies and categorized accordingly.

Pershing Advisor Solutions LLC, a subsidiary of The Bank of New York Mellon Corporation, member FINRA, SIPC. Clearing, custody or other brokerage
services may be provided by Pershing LLC, member FINRA, NYSE, SIPC. Pershing Advisor Solutions relies on its affiliate Pershing to provide execution services.
Trademark(s) belong to their respective owners. For professional use only. Not for distribution to the public.
This guidebook is part of a program designed to help registered investment advisors and financial
services firms identify trends, enhance operations and grow revenue. It represents Pershing Advisor
Solutions’ unique approach to practice management support—going beyond high-level guidance to
offer actionable information, personalized consulting and ready-to-execute programs.
To learn more about Pershing Advisor Solutions, visit us on the web at
www.pershingadvisorsolutions.com.
About the Authors
Thomas Roughan
Thomas Roughan is a Partner at Capco in the Capital Markets practice with over 20 years experience in
financial services and consulting. He has led numerous business strategy, operational performance improvement,
risk and control and IT assessment engagements. His client base has included broker dealers, investment
managers, wealth managers, custodian banks, clearing firms, stock exchanges and depositories. Prior to joining
Capco, Tom worked for Ernst Young Management Consulting in their Financial Services practice and with
State Street Bank in the Institutional Investor Services division.
Darren Appannah
Darren Appannah is a Managing Principal in Capco’s Capital Markets practice. Darren is responsible for the
delivery of strategy and business transformation focused projects for clients including global banks, broker
dealers, wealth and investment managers, clearing firms and stock exchanges. Darren has led the research and
development of a number of thought pieces and contributed to Capco’s leading-edge thinking on a number
of industry topics. Prior to joining Capco, Darren worked for Ernst Young Management Consulting in
their Financial Services practice, focusing on managing large-scale business transformation projects.

30123
GB-PAS-GLB-5-10
About Us
Pershing Advisor Solutions LLC (member FINRA/SIPC) is an affiliate of Pershing LLC and a leading custodian to independent registered investment advisors and
dually registered advisors working in conjunction with many of Pershing LLC’s introducing broker-dealer customers. Pershing LLC (member FINRA/NYSE/SIPC),
a BNY Mellon company, is committed to delivering dependable operational support, robust trading services, flexible technology, an expansive array of investment
solutions, practice management support and service excellence. Through an innovative custody platform, Pershing Advisor Solutions delivers superior expertise and
scalable and customizable solutions to help independent registered investment advisors manage and grow their businesses. Additional information is available at
www.pershingadvisorsolutions.com.
About Capco
Capco is a leading global provider of integrated consulting, technology, and transformation services dedicated solely to the financial services industry. Our
professionals combine innovative thinking with our unrivalled first-hand industry knowledge to offer our clients consulting expertise, complex technology and
package integration, and managed services to move their organizations forward. Through our collaborative and efficient approach, we help our clients successfully
increase revenue, manage risk and regulatory change, reduce costs and enhance control. In North America, we specialize in Banking; Capital Markets; Wealth and
Investment Management; Finance, Risk Compliance and Technology with offices in Chicago, D.C., New York, San Francisco and Toronto. To learn more, contact us
at + 1 212-284-8600 (+32 3 740 10 00 from outside the United States or Canada), or visit our Web site at www.capco.com.

International Investing PAS

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to International Investing PAS

Similar to International Investing PAS (20)

International Investing PAS