Emerging Markets Equities

The LHO Global Markets Fund, LP and our Global Emerging Markets Institutional Fund are designed to take maximum advantage of the Olsen methodology and the knowledge, experience and access we have in early stage Emerging Markets as well as mainstream markets. In contrast to the more conservative approach we take with our Institutional Fund, in our Global Emerging Markets Fund we look for opportunities for gain anywhere that is well supported by our methodology. Once we find such opportunities, we may concentrate the portfolio in a few particularly promising areas. We occasionally use leverage to achieve our goals of reasonably high return with limited risks.

Our approach to emerging markets investing is based on the relative importance of country factors vs. company factors due to: 1) the high degree of correlation between stocks within each emerging country, and 2) the highly divergent country performances between emerging countries. These divergent performances are the result of specific economic and political factors.

From year to year, a number of countries shift in or out of the best half of country performance, according to the political changes in policy direction or occasionally, due to the complete transformation of culture. Perhaps it's not surprising then that a portfolio of the worst performing large cap stocks in the developed countries will outperform a portfolio of the best performing large cap stocks from the less developed countries. The clear conclusion is that country factors are more powerful than the specific company selection factors, which are the usual focus in international investment management.

The Olsen Country Selection Methodology

Our country selection methodology is based on economic and political factors that have historically explained performance differentials among emerging markets countries. After years of research and development, we have quantified these in three proprietary country indices: The Olsen Investment Attractiveness Index, The Olsen Valuation Index and The Olsen Risk Potential Index. Each consists of macroeconomic and political factors. Some can be measured and quantified; others are subjective but placed on a compatible scoring basis with the quantifiable measures. We then score these causal factors and rank countries within each index. The three indices together provide a very powerful read on the likely future direction of performance in each country. Over most of the period since we began this approach in early 1995, our funds have outperformed the relevant benchmarks and manager universe.

Methodology Criteria

We analyze and score the following eight factors to establish country attractiveness ratings:

• Market freedoms
• Savings and investment culture
• Stage of economic development
• Inflation propensity
• Quality of economic and financial data
• Exchange rate mechanism
• Stage of financial market development
• Political and economic culture

We then measure and score the following valuation criteria:

• Country market index levels
• P/E ratios in equity markets
• Real interest rates in debt markets

Finally, we measure and score the following risk potentials:

• Real interest rates
• Volatility of local stock market
• Current account deficit
• Political stability and potential for change
• Foreign exchange reserves
• Exchange rate value potential for change