RIC Emerging Markets Equity Fund

October 2011
Russells Emerging Markets Equity Fund offers investors exposure to some of the best emerging markets equity managers in the world. The Fund seeks to consistently outperform its benchmark by creatively and intelligently combining the differing approaches of these skilled investors in one portfolio. This multi-style, multi-manager approach can deliver more consistent returns in a variety of different markets, as it helps to balance out the dispersion caused by country, market and style effects. Superior and consistent performance
Russells multi-manager approach offers some key benefits, most notably the potential for consistently higher returns. We have long been acknowledged as a global market leader in terms of manager research and we believe that our well resourced, highly experienced team can identify a number of dedicated, emerging market specialist managers. In what is a capital constrained market, our experience in identifying and employ these managers in a disciplined and efficient way is a key attribute of Russell's processes. The multi-manager portfolio allows us to create a prudent portfolio that uses managers that will aggressively seek out the highest returns, while keeping overall risk to an acceptable level. The markets rebound in 2009 was exceptional, and they significantly outperformed their developed peers, with investors attracted by better-capitalised and less leveraged financial systems (creating stronger foundations for future growth) and by policymakers that are more experienced at navigating periods of economic turbulence. EM economies were more structurally robust than they had been in the past, with South-South trade' proving resilient. Economic conditions improved and commodity prices continued to rally as Asian leaders to maintain stimulus measures until there was durable growth.

Future catalysts for growth

Investors continue to be attracted by the key economic advantages of the developing world - higher GDP growth rates and healthier demographic conditions. According to the IMF, China is the biggest single country contributor to global economic growth, with Russia, Brazil and India also among the top eight contributors. Higher growth presents the opportunity for increased corporate profitability which, over the longer term, should result in higher equity market returns. Meanwhile, rapid population growth as much as five times as fast as in developed countries generates a high, and increasing, proportion of young, skilled and aspirational workers keen to join the ever expanding middle classes. There is, therefore, scope to exploit potentially significant increases in consumer spending.

Emerging markets: a risk rewarded?

The World Bank defines an emerging market (EM) as one where the per capita gross national product is less than $9,385 a year, and where the economy is typically opening up by embarking on a reform programme. These developing economies have a wealth of natural resources, represent approximately 75% of the world's land mass, and account for around 80% of the global population, including China. Investing in these markets is by no means easy a country can be unstable, data is often of low quality, while company or economic news can be slow to filter through to the markets. All of this can potentially create greater market inefficiencies, which can in turn provide broad and attractive opportunities for active managers. Returns can thus be very volatile, with the asset class suffering a number of previous crises be it currency-, debt- or credit-related as was seen at the end of 2008. But all of these risks come with the territory, the potential for alpha - or outperformance - and very positive absolute returns is significant.

Fund Inception : 20/12/1994 Fund Size : US$ 3,476 million (30/09/2011) Bloomberg Ticker : FRIEMEI ID Benchmark : Russell Emerging Markets Index Net Fund Complex : Russell Investment Company plc

RIC Emerging Markets Equity Fund // October 2011

Russell Investments

Alliance Bernstein (Value Orientation, 15%)

Mandate Inception : Q2 1999 Location : New York Parent Company : Alliance Capital Management Alliance Bernstein's investment approach is based on the premise that market participants tend to overreact to near-term events, resulting in the creation of stock mispricings that it can exploit. Alliance Bernstein achieves this through a disciplined, value-based approach. Stocks are screened using quantitative techniques and those that exhibit the most pronounced value are then researched in depth by the firm's large team of global sector analysts. Those stocks considered most mispriced are subsequently purchased. The inherent risks resulting from this bottom-up approach are controlled explicitly through the use of an optimization tool and portfolios are well diversified. As well as the classic value characteristics of low price-to-book and low price-to-earnings, Bernstein's portfolios also exhibit a small capitalisation bias.

Harding Loevner Management (Market-oriented, quality, 22.5%)

Mandate Inception : Q2 2006 Location : Somerville, New Jersey Parent Company : Harding Loevner Management Harding Loevner is a boutique investment manager with a focus on international and emerging markets. The manager has a bottom-up approach that emphasises companies with high quality characteristics that benefit from sustainable, advantageous market positioning and strong balance sheet status. Harding Loevner seeks to identify those companies that are set to prosper from a strong operating outlook over a long time horizon. Portfolios tend to be relatively concentrated and are constructed with an awareness of country specific risk. The main attraction of the strategy is experienced portfolio manager, Rusty Johnson. Rusty has a broad knowledge of all emerging and developed markets, which enables him to compare stocks across different regions in an effective way.

Arrowstreet Capital (Market-oriented, quant, 17.5%)

Mandate Inception : Q2 2003 Location : Cambridge, M.A. Parent Company : Arrowstreet Capital Arrowstreet employs a multi-dimensional, quantitative approach to identifying anomalies across emerging equity markets. Recognising the high importance of country, currency and sector influences as potential sources of outperformance, Arrowstreet seeks to exploit the inefficiencies in company valuation and investor behaviour that it identifies at these levels. By implementing its quantitatively-derived return forecasts through the over- or underweighting of country/sector baskets (e.g. Taiwanese Banks, Korean Technology, etc.), its process is distinctive relative to peers, making Arrowstreet particularly attractive in a multi-manager emerging markets equity context.

UBS (Growth, momentum, 12.5%)

Mandate Inception : Q3 2007 Location : San Diego Parent Company : Allianz Global Investors UBSs Emerging Market Opportunities portfolio is a growthoriented product. It employs a relative price momentum strategy (exploiting behavioural trends in emerging markets) in combination with a qualitative/ fundamental overlay. Screens are applied to identify the most attractive stocks exhibiting rising relative price strength and accelerating earnings growth. Fundamental research is then applied to find the key drivers that will sustain that growth. The process is unique in its specific focus on evidence of positive fundamental change, sustainability and timeliness (i.e whether the news is known by the market yet and whether it has already been priced into a company's valuation). It has a much shorter investment time horizon than the other managers in the mix, notably Genesis and Harding Loevner.

Genesis (Market-oriented, 17.5%)

Mandate Inception : Q4 1994 Location : London Parent Company : The Genesis Group As a firm, Genesis focuses only on emerging markets. It constructs concentrated portfolios based on its detailed research and understanding of bottom-up stock-specific opportunities. Securities are selected on the basis of a growth-at-a-reasonable-price philosophy, with emphasis on valuation and cashflow growth. As a boutique firm operating in this asset class, Genesis tends to be an early investor in 'pre-emerging' markets (non-index), as well as smaller securities in the larger markets. This specialisation gives the firm a competitive edge over peers.

RIC Emerging Markets Equity Fund // October 2011

Russell Investments

Victoria 1522 Investments (Market-oriented, thematic growth, 7.5%)

Mandate Inception : Q2 2011 Location : San Francisco, California Parent Company : Victoria 1522 Investments Victoria 1522s investment process uses a combination of macroeconomic analysis to identify major themes together with highly independent fundamental research and on-the ground investigation to pinpoint the strongest companies that may benefit most from these themes. Anticipating trends well before they become consensus is the cornerstone of the strategy. The manager has a highly opportunistic and flexible approach which is focused on getting the highest return opportunities into the portfolio, independent of capitalisation or benchmark status. Integrating macroeconomic analysis, theme development and sector/industry analysis into their focused company selection process, they invest in between 30 to 60 stocks that she believes have the greatest investment return potential in the emerging markets.

Somerset Capital (Quality Value, 7.5%)

Mandate Inception : Q2 2011 Location : London Parent Company : Somerset Capital Somerset Capital employs a highly disciplined investment approach in identifying high quality companies with a strong growth trajectory that are trading at very attractive valuations. We have developed our strong conviction in the quality of the SC team over many years, since its time at Lloyd George, and continue to admire its focus on covering the full breadth of opportunities in the asset class and generating high returns. This specific mandate is targeting less efficient parts of the market in small- and mid-cap segments, together with a dedicated Frontier Markets exposure; it has a custom benchmark. The addition of this strategy increases the Funds alpha potential, specifically by targeting less efficient parts of the market and increasing the diversification characteristics of its value exposure.

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