Top-Down Asset Allocation for Latin America

Clairvoyant Investment Advisors

Sonia Kopp

Chris Lyford

Peter O’Hara

Denis Rappaport

Michelle Todd

February 24, 2000

Investment Mandate

To use a top-down asset allocation model to dynamically allocate amongst five Latin American Countries with the objective of outperforming established dollar-priced Latin American indices.

Markets and Indices

Argentina Brazil Chile Mexico Venezuela IFC Latin America U$ Index MSCI Latin America U$ Index

In-Sample Model SummaryAsset Class Variable Lag Coefficient T-Ratio Adjusted R^2 D-W

Chile Equities Var. of Reserves 1 0.28 1.62 0.066 1.813Unemployment 2 -0.15 -1.41Mexico Returns 1 0.18 2.50

Brazil Equities Brazil P/BV to LA P/B 1 -0.56 -3.73 0.092 1.854Brazil P/E to LA P/E 1 0.00 1.85Exchange Rates 1 -0.16 -1.86Brazil P/E 1 0.00 -1.91

Mexico Equities Int'l Investor Country Rating1 0.00 3.48 0.201 1.994Price/Earnings 1 0.00 -2.43Exchange Rates 1 -0.39 -2.51Interest Rates Variation 1 6.78 2.83Price/Book Value 1 -0.01 -2.63

Venezuela Equities Exchange Rates 1 -0.16 -1.25 0.14 2.332Int'l Liquidity 2 0.43 2.88Oil Exports 2 0.41 2.70Price Earnings 1 0.01 1.23U.S. Risk Free 1 22.63 1.28

Argentina Equities Bond Yield 1 -0.49 -3.97 0.192 2.002Inflation Rates 1 3.78 2.53Brazil Returns 1 -0.23 -2.23

1999 Out-of-Sample ResultsIFC MSCI

Portfolio Return Benchmark return Benchmark returnJan'99 -4.17% -11.88% -7.21%Feb'99 4.97% 5.62% -6.83%Mar'99 18.45% 20.72% -0.56%Apr'99 15.59% 14.29% 24.24%May'99 -3.09% -3.81% 15.21%June'99 3.76% 3.98% -5.82%July'99 -6.33% -7.10% 5.90%Aug'99 -2.05% -3.13% -10.54%Sep'99 3.26% 1.80% -0.16%Oct'99 0.88% 1.76% -0.24%Nov'99 8.38% 12.71% 4.90%Dec'99 17.33% 16.43% 12.91%Total Return 68.32% 57.11% 29.51%

Currency Comment

A Critical Issue Overlays Expensive Predicting Returns: Avoiding De-valuations

Final Insights and Remarks

Implementation Time Horizon Model Deterioration Improving Top-Down Latin American

Strategies in the Future

Raw Direction Count DataIn-Sample Raw Direction Count and Percentage Argentina Brazil Chile Mexico VenezuelaTotal Correct Direction: 60 60 65 73 49Total Incorrect Direction: 30 44 42 35 30% of Correct Direction: 66.7% 57.7% 60.7% 67.6% 62.0%Total Positive Directions Forecasted Directly 38 43 48 48 28% of Positive Directions Forecasted Correctly 76.0% 72.9% 82.8% 71.6% 71.8%Total Negative Directions Forecasted Correctly 22 17 17 25 21% of Negative Directions Forecasted Directly 55.0% 37.8% 34.7% 61.0% 52.5%

Out-Of-Sample Raw Direction Count

Total Correct Direction 3 4 9 4 6Total Incorrect Direction 9 8 3 8 6% of Correct Direction 25.0% 33.3% 75.0% 33.3% 50.0%Total Positive Directions Forecasted Correctly 1 0 5 4 2% of Positive Directions Forecasted Correctly 12.5% 0.0% 83.3% 44.4% 40.0%Total Negative Directions Forecasted Correctly 2 4 4 0 4% of Negative Directions Forecasted Correctly 50% 100% 67% 0% 57.1%