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The Evolving World of Equity Indexing
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
2
Agenda
• Understanding Index Construction and Benchmark Selection
• Institutional Trends and Home Country Bias
• Structural Case for Emerging Markets: Impact, Access and Liquidity
• iShares Portfolio Management Approach
3
Why indexes matter
• Indicators for stock market sentiment– Total equity market
– Equity market segments
• Starting point for key portfolio decisions– Asset allocation drives portfolio performance
– Diversification is a key to risk reduction
• Performance assessment– Index strategies: Tracking benchmark performance?
– Active strategies: Outperforming benchmark performance?
4
Scoring of selected benchmark families based on framework
Ratings (5 = best)
Characteristic
Wilshire 5000 Russell 3000 S&P 500® Russell
1000S&P 600
Russell 2000
MSCI ACWI IMI
Russell Global Index
S&P Broad Market Index
Completeness of coverage 5 4 2 5 3 5 4 4 4
Investability of stocks in index 1 4 5 5 4 4 4 3 3
Float adjustment of market cap weights 5 4 3 4 3 4 4 4 3
Objective, published rules 4 5 1 5 1 5 4 5 1
Acceptance by institutional investors 2 4 5 3 1 5 5 1 1
Investors’ access to index 3 4 5 4 4 5 3 1 1
Institutional index funds Yes Yes Yes Yes Yes Yes Yes No1 No1
ETFs Yes Yes Yes Yes Yes Yes No No No
Availability / liquidity of derivatives N/A Low High Low Low High N/A N/A N/A
Turnover and related costs 4 4 4 4 1 2 4 4 4
Source: BlackRock, as of 12/31/09.1. At BlackRock, we are not aware of other index providers offering these index funds.
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Institutional investor use of benchmarks
Institutional Use of US Equity Benchmarks
Ass
ets
in U
S$ B
illio
ns
987.37
137.754.48
145.89
48.52 0.00
357.80
96.05
0
200
400
600
800
1000
S&P500®
Russell1000
S&P600
Russell2000
Russell3000
Wilshire5000
S&P 500
Growth
Russell 1000
GrowthSource: Russell, as of 12/31/09.
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Significance in the world equation
International economies contribute 77% of the world’s output…
•…however constitute only 58% of the world’s equity markets
World GDP Market Capitalization
DevelopedMarkets ex-US44%
EmergingMarkets 13%
Frontier1%
US42%
EmergingMarkets 37%
Frontier6%
DevelopedMarkets
ex-US34%
US23%
Sources: FactSet, as of 07/10; MSCI Inc., ACWI, Citigroup Global Markets, IMF, as of 12/08–12/09.
7
US public plans have significant home country bias
International equities are 58% of the world’s equity markets
Market Capitalization
DevelopedMarkets ex-US44%
EmergingMarkets 13%
Frontier1%
US42%
Sources: FactSet, as of 07/10; MSCI Inc., ACWI, Citigroup Global Markets, IMF, as of 12/09.
… but US DB plans have a significant home country bias (61% US equities)
Average Equity Allocation
International Equities39%
US Equities
61%
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Home bias is decreasing in developed markets
Japan
UK
US
Sources: Pensions & Investments (US), Pension Fund Association (Japan), SSgA, Greenwich Associates (UK), BlackRock 2009.
% E
quity
Ass
ets
Inve
sted
in H
ome
Cou
ntry
Pension plans in all developing markets have been decreasing their home bias
US pensions have decreased their home equity over the past decade
We expect pension plans around the world to continue to reduce their home bias
40%
45%
50%
55%
60%
65%
70%
75%
80%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
% Pension Plan Equity Assets Invested in Home Country
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Emerging Markets
11.5%
ACWI Small Cap
13.1%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Mar
ket C
apita
lizat
on ($
B)International equity benchmark comparison
Sources: BlackRock, FactSet. MSCI Weightings as of July 30, 2010.*US Assets shown above reflect MSCI US.
Total Market Cap (USD, $B)
10,469 20,173 21,153 24,390 28,069 28,159
# of Securities 594 1,559 1,659 2,423 8,824 8,999
Canada
Emerging
Small Cap
Frontier
EAFE
US
US* US + EAFE World ACWI ACWI IMI ACWI IMI +
US +EAFE +Canada +Emerging +Small Cap +Frontier
Canada 5.1%
Canada 4.4%
Emerging Markets
13.3%Canada
3.9%
Emerging Markets
11.5%
ACWI Small Cap
13.1%
Canada 3.8%
Frontier0.4%
EAFE 45.9%
EAFE 48.3%
EAFE 39.8% EAFE
34.6%EAFE 34.4%
US 100.0%
US 51.7%
US 49.0%
US 42.5%
US 36.9%
US 36.8%
Frontier
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Emerging and frontier markets complete the international country exposure
Sources: IMF and World Bank 2008–2012 GDP growth forecasts, as of 7/09.
Five-Year GDP Growth ForecastUS: 1.7%Developed: 0.9%Emerging: 3.6%Frontier: 3.7%
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Emerging markets are too large to ignoreSignificant portion of the world’s capital
Sources: Merrill Lynch, BP, CIA World Factbook, IMF World Economic Outlook, MSCI Inc.For illustrative purposes only.
Emerging Economies as % of Total World, 2008–2009
Market Cap (float adjusted)
Exports
GDP at PPP
Energy Consumption
Foreign ExchangeReserves
Land Mass
Population
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Emerging Markets Developed Markets
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The structural case for EM: Where is the growth?
0%
20%
40%
60%
80%
100%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
EU-5 Japan United States Other
Source: Goldman Sachs, December 2009. EU-5 = France, Germany, Italy, Spain & UK. Projections are for illustrative purposes only.
Percent of World GDP 2000 – 2050
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What are emerging and frontier markets?The MSCI country classification
Source: MSCI Inc., as of 7/30/10.
MSCI Emerging Markets Index
Latin America Brazil Chile Colombia Mexico Peru
Europe, Middle East and Africa Czech Republic Egypt Hungary Morocco
Emerging Asia China India Indonesia South Korea
MSCI Frontier Markets IndexCentral and South America
Central andEastern Europe
Middle East and Africa
Asia Sri Lanka Vietnam Pakistan
Lithuania Romania Republic
of Serbia Slovenia Ukraine
Bulgaria Croatia Estonia Kazakhstan
Poland Russia South Africa Turkey
Malaysia Philippines Taiwan Thailand
Nigeria Oman Qatar Tunisia UAE
Argentina Trinidad & Tobago
Bahrain Jordan Kenya Kuwait Lebanon Mauritius
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Long-term return opportunities
Cumulative returns since 6/30/99
Source: Bloomberg. Based on monthly price returns 6/30/99–07/31/10.
Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
For actual iShares Fund performance, please visit www.iShares.com or request a prospectus by calling 1-800-474-2737.
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
MSCI EMMSCI EAFES&P 500MSCI WORLDMSCI ACWI
®
Ret
urns
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Modular view of iShares international and global ETFs
As of 12/09.
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Total Performance Management
Sources of Tracking Error
Portfolio management
Portfolio Construction
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BlackRock’s core investment philosophy: Total performance management
Return• Value-added portfolio management seeking to
deliver performance as planned
• Access to significant breadth of market exposures and solutions
Risk• Proprietary portfolio and risk management systems
help to manage investment and operational risk
Cost• Physical delivery of underlying stock in exchange for
ETF shares
• Trading costs integrated into portfolio construction using proprietary transaction cost models
• Leveraging scale into reduced portfolio management costs
• Focus on best execution
We believe that optimal investment outcomes are best achieved through a disciplined, objective process for managing return, risk and cost
Total Performance Management
Return Risk
Cost
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Sources of potential tracking error
Enha
nces
Ret
urn
Red
uces
Ret
urn
Tax Reclaim Process
Securities Lending
Treatment of Corporate Actions and Index Changes
Portfolio Construction: Optimization/Stratified Sampling
Cash Drag/ Pop
Transaction Costs
Illiquidity
MinimizeImpact
Maximize Impact
For illustrative purposes only.
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Portfolio construction
Fund-level security weights relative to the benchmark
Fund-level exposure to risk factors, which contribute to both predicted and realized tracking error
Two ways of looking at an indexed portfolio:
For illustrative purposes only.
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Portfolio Construction
For illustrative purposes only.
Every iShares Portfolio falls somewhere on the spectrum of optimization.B
asis
Poi
nts
PTE
IVV/ IWM
EEMEFA
PFF
Total % of Security Misweights
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Portfolio Construction
Sample screenshots are for illustrative purposes only.
Security weights relative to benchmark weights are just one way to evaluate how we manage an indexed fund
22
Portfolio Construction
Sample screenshots are for illustrative purposes only.
Risk factor exposure is a much more accurate way of determining the predicted mis-tracking due to security mis-weights in a fund.
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Portfolio Construction: Balancing transaction costs and tracking error
• Greater levels of optimization used when a benchmark index has a large number of holdings or low liquidity
• Prohibitive costs, uncertain liquidity, and issue scarcity can make perfect replication infeasible
• Portfolio construction process optimizes marginal contribution to tracking error with transaction costs
Quantitative process helps determine optimal portfolio based on Barra’s risk factors
Tracking Error
Number of Issues held relative to benchmark
Transaction Costs
Basi
s Po
ints
For illustrative purposes only.
Source: BlackRock.
EEM Optimal Portfolio
IVV Optimal Portfolio
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Conclusion
• Index considerations form the foundation of portfolio construction – “not all benchmarks created equal”
• Institutional benchmark selection as a guide
• Benchmarks can serve as a starting point for asset allocation
• Continued index innovation affords broader exposure to equities globally
• Optimal investment outcome through disciplined management of return, risk, and cost
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Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectuses carefully before investing.
Investing involves risk, including possible loss of principal.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country, narrowly focused investments and investments in smallercompanies typically exhibit higher volatility.
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The information provided is not intended to be a complete analysis of every material fact respecting anystrategy and has been presented for educational purposes only.
Asset allocation models and diversification do not promise any level of performance or guarantee againstloss of principal.
Shares of iShares Funds are bought and sold at market price (not NAV) and are not individually redeemedfrom the Fund.
Mutual funds and iShares Funds are obliged to distribute portfolio gains to shareholders by year-end. Thesegains may be generated due to index rebalancing or to meet diversification requirements. Trading shares ofthe iShares Funds will also generate tax consequences and transaction expenses. Certain traditional mutualfunds can be tax efficient as well.
When comparing stocks or bonds and iShares Funds, it should be remembered that management feesassociated with fund investments, like iShares Funds, are not borne by investors in individual stocks orbonds. The annual management fees of iShares Funds may be substantially less than those of most mutualfunds. Buying and selling shares of iShares Funds will result in brokerage commissions, but the savingsfrom lower annual fees can help offset these costs.
Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide taxadvice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot beused by you for the purpose of avoiding tax penalties; (ii) this communication was written to support thepromotion or marketing of the matters addressed herein; and (iii) you should seek advice based on yourparticular circumstances from an independent tax advisor.
Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Indexperformance returns do not reflect any management fees, transaction costs or expenses. Indexes areunmanaged and one cannot invest directly in an index. Past performance does not guaranteefuture results.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
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The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Cohen & Steers Capital Management, Inc., Dow Jones & Company, Inc., European Public Real Estate Association (“EPRA®”), FTSE International Limited (“FTSE”), iBoxx®, JPMorgan Chase & Co., MSCI Inc., Morningstar Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell Investment Group or Standard & Poor’s, nor are they sponsored, endorsed or issued by Barclays Capital. None of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above. Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Real Estate 50/Residential/Retail/Mortgage or Industrial/Office Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-US/North America/Europe/Asia Index; all rights vest in FTSE, NAREIT and EPRA. All rights in the FTSE Developed Small Cap ex-North America Index vest in FTSE. FTSE is a trademark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under license.The iShares Funds are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. BFA is a subsidiary of BlackRock Institutional Trust Company, N.A., neither of which is affiliated with SEI.©2011 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trade- marks are the property of their respective owners. iS-4058-0111 3087-CM05-9/10
Not FDIC Insured • No Bank Guarantee • May Lose Value
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
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THANK YOU
