A: The Asian financial crisis of 1997 was the result of a domino-like series of events. The roots of the crisis were over-investing, over-borrowing, and fixed exchange rates. A period of major overinvestment in the region had resulted in significant deficits for many emerging Asian economies. At the same time, their currencies were pegged to the strengthening U.S. dollar, which made their goods and services increasingly more expensive and less competitive in the global economy.

As economic pressures grew, these countries were unsuccessful in their attempts to defend their currencies by raising interest rates. Eventually, the countries had to unpeg their currencies from the U.S. dollar, leading to the devaluation of many Asian currencies. These devaluations were a major blow to the Asian banking system, significantly raising the cost of servicing large amounts of U.S. dollar-denominated debt. The large number of defaults that followed placed immense strain on the banking system, caused economies to stall and helped push Asia into recession after years of strong growth.

These Asian emerging markets have seen many fundamental improvements since the Crisis, both at the macro-economic as well as at the corporate level. As a consequence, the real roots of the Crisis (i.e., over-investing, over-borrowing, and fixed exchange rates) appear quite healthy today.

Q: Presumably, this hasn’t suddenly become a “riskless” asset class. What are some of the risks that are still associated with investing in emerging markets?

A: We’re not saying the risk is gone. There will be volatility going forward, but the factors that exaggerated the volatility in the past have been addressed in very meaningful ways. As discussed, from an investing and fundamental standpoint there clearly have been significant improvements. However, given the tremendous interest and flows into this sector, corrections can always be expected - one still has to guard against the short-term skittishness of some investors who invest in this asset class. Other key risks would include:

Political Risks: In general, emerging markets carry more political risk than developed markets. However, although governmental reforms can be delayed, many emerging countries now seem increasingly committed to deregulation and moving towards a more capitalist society.

Fluctuating Commodity Prices: Some emerging markets are quite dependent on their natural resources, so there are risks associated with declining commodity prices.

Rising Oil Prices: Emerging market countries that are net oil importers could face deteriorating current account surpluses, rising inflation and higher interest rates if the oil price remains high for an extended period.

Global Economic Slowdown: Global growth is the most sensitive factor. Emerging markets could be impacted if interest rates rise to levels that meaningfully slow global economic growth.

Q: How many stocks do you usually own? What exposures do you have in terms of sectors or countries?

A: We usually own between 80 and 120 names, with the top 10 holdings typically accounting for 20% to 35% of the portfolio. The regional breakdown (as of 12/31/06) shows we have approximately 40% in Asia, 35% in Latin America, 15% in Europe and 10% Africa. Some of our larger country exposures within these regions are respectively South Korea and China, Brazil and Mexico, Russia, and South Africa. At the sector level, our largest exposure is to the Consumer stocks (both Discretionary and Staples), which jointly represent close to a quarter of the portfolio. We have about 20% in Financials and then another third of the portfolio is evenly split between the Energy/Materials and IT/Telecommunications sectors. Again, these regional, country and sector exposures are driven by our “bottom-up” stock selection process as opposed to “top-down” allocation decisions.

Q: What is your view on risk management?

A: Risk management is an essential element in our investment and portfolio construction process. Broad diversification is a critical objective. Risk management starts with the selection of each individual company. If the core of our portfolio consists of attractively valued companies that are self-financed, highly cash generative, with strong balance sheets and dominant franchises, then a large portion of the risk is addressed. We also manage risk by a cross-check of sectors and country exposures. Additionally, this is an all-cap portfolio rather than just large-cap, so the risk is further spread and diversified across a multi-cap spectrum.

Q: So the rationale is that when the popularity of emerging markets diminishes as interest rates in the U.S. and Europe go up, the dominant franchise that is not dependent on capital investments is likely to retain its value. Is that correct?

A: Yes. In our view, a high-quality and profitable company may see its valuation decline when fund flows stop, but the long-term view will remain positive provided we’re confident that it can continue to reinvest and generate strong returns. Short-term flows are extremely hard to predict, but “quality” companies that are self-financing should have better longer-term visibility – overall they have better chances of being masters of their own destiny. Stock markets can dictate a company’s near-term share price movements, but in the long-run we have found their earnings growth and sustainability to be the key determinants.

Q: Emerging markets have delivered very strong returns over the last few years. Is it too late for new investors to be dipping their toes in now and how would you sum up the overall attractions of emerging markets at this time?

A: We continue to believe emerging markets offer significant attractions for many investors who are willing to invest with a mediumto long-term time horizon. However, for those investors with short-term horizons, there’s potential susceptibility to some short term profit taking given the asset class has performed so well in recent years.

Some of the key points to consider about investing in emerging markets are: 1. These are fast-growing economies with expanding stock markets and populations that represent above 80% of the world’s population. 2. A growing middle class and domestic economy to help “balance” the overall economy. 3. Diversification benefits for an overall portfolio strategy. 4. Valuations that still appear attractive despite strong returns in recent years. 5. Improving fundamentals, both at the macro-economic and corporate level.

Despite these much improved fundamentals, emerging markets are still likely to be more volatile than developed markets. However, over the long term, for some investors the opportunity risk of having no exposure to this growing segment of the world’s investment universe may be greater than the risk of buying at a short-term peak.