Delaware Investments is the marketing name of Delaware Management Holdings, Inc' and its subsidiarie

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International Stocks in a Globalized
WorldOpportunity and the Perils of Complacency
in Equity Investing
Ned Gray Senior Portfolio Manager Delaware
Investments International Equity

• TEXPERS 18th Annual Conference
• Austin, Texas
• March 20, 2007

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International Stocks in a Globalized World
Opportunity and the Perils of Complacency in
Global Investing

• Attention to currency by fund managers and plan
  sponsors U.S. vs. International mandates
• Illustration of currency impacts Cat vs. Komatsu
• How do markets compare?
• Where does currency impact appear?
• Incorporating currency into an analytical
  approach
• Conclusion

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Caterpillar vs. Komatsu 1980 - 1984

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Historic Currency Variability
US composite index
U.S. dollar has been highly variable - Very
strong 1981 to 1985 1996 to 2000 - Weak
1986 to 1995 since 2005
Source Bloomberg DXY
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How do Fund Managers and Plan Sponsors Pay
Attention to Currency?
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How do Markets Behave?
Absolute volatility of market returns in US
Portfolios of U.S. stocks are no less variable
than portfolios denominated in foreign
currencies. There is very little excess
volatility of non U.S. equity markets compared to
U.S. markets.
Source SP, MSCI, Delaware Investments
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Geographic Spreads Non U.S. vs. U.S. Markets
EAFE
SP 500
Stocks in EAFE reflect far greater geographical
diversification of companies assets, revenue and
income.
Source Worldscope database, Delaware Investments
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(Non) correlations between currency stock
pricesStocks are stocks and currencies are
currencies!
U.S. (blue) vs. EAFE (green)
On average there is minimal correlation between
stocks and currencies DXY is US dollar composite
index.
Source FactSet, Bloomberg
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Parts of the US market display currency
susceptibility as great or greater than Non-U.S.

Source Worldscope
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How are currency exposures manifest?

• Exposure varies with degree of mismatch between
  currencies earned and currencies spent.
• Susceptibility of domestic market to foreign
  competition.
• - What is the currency of determination?
• Less obvious, potentially more damaging
• How do markets compare?

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How do markets compare?
Source FactSet, Bloomberg
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Is this exposure reflected in stock prices?
Source Barra
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Incorporating Currency into an Analytical Approach

• At the Portfolio Level
• - Be aware of implicit exposures.
• - Relative susceptibility may vary with portfolio
  concentration.
• Some insight possible through aggregation of
  regional segment breakdowns
• and comparison with relevant benchmark.
• - Know the limits of what is knowable detailed
  knowledge is practical only at the security
  level.
• At the Security Level
• - Distinguish between relatively benign exposures
  and those that go to the core of global
  competitiveness

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Incorporating Currency into an Analytical Approach

• At the security level, determine the balance of
  relative exposures
• Global revenue diversification or even
  concentration in a single foreign currency
• may not imply susceptibility of competitive
  position to adverse currency movements.
• - Translation adjustments are likely to impact
  earnings in the short term only
• Export at your peril
• - Of far greater concern is the mismatch of
  exposures between cash inflows and outflows.
• - Revenue/cost imbalances must be accompanied by
  sustainable advantages to be viable in
• the long term.
• Consider import competition
• A purely domestic player may still be done in
  by adverse currency movements.

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Currency impact on Competitiveness
1. Export at your peril

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Currency impact on Competitiveness
2. Consider import competition

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Currency impact on Competitiveness
3. Competitive interaction of currency movement
and price A continuous process

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Conclusion
In matters of currency exposure, the division
between U.S. and International domicile is
largely artificial, reflecting differences in
degree, not in kind. Non-U.S. Managers are in
many cases more adept at managing currency to
their advantage. Awareness of currency issues
should be part of any risk evaluation from the
fund down to the security level.

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Caterpillar and Komatsu