Emerging Markets Growth Commentary

December 31, 2007

The Driehaus Emerging Markets Growth Composite outperformed its benchmark, the MSCI Emerging Markets Growth Index (the “Index”), by approximately 270 basis points. Strong investor sentiment within the emerging markets sector is being partially fueled by the fact that these economies have been able to weather financial difficulties better than many developed markets.  Recently, many governments of emerging market countries have been paying off debt, running current account surpluses and have established strong foreign exchange reserves.  As a group, emerging markets are now a net creditor to the U.S. 

The Strategy benefited from strong stock selection and an underweighting in the Industrials and Materials sectors as compared to the Index.  In addition, poor forecasts for sales and earnings growth resulted in the two largest underweightings in the Financials and Materials sectors. The Strategy’s two largest overweightings in the Consumer Discretionary and Telecommunication Services sectors were driven by increased earnings growth and accelerating sales.

From a country perspective, the Strategy’s two largest overweightings versus the Index were in Hong Kong and the United Kingdom, and the two largest underweightings were in China and Russia. The Strategy’s returns, compared to the Index, benefited from the underweight allocation to China; however, the underweighting to Russia detracted from performance.  Due to signs of moderate slowing within these two countries, the Strategy remains underweight in those regions. Overweighting to the United Kingdom positively impacted performance. The Strategy remains overweight in Hong Kong and the United Kingdom due to their strong earnings growth outlook.

Positions in South Africa and India were the top contributors to performance during the quarter.  Stock selection in China also contributed to the Strategy’s return.  Within these countries the Strategy benefited from holdings in the Industrials, Materials, and Energy sectors. In India, positive results were attributed to the construction segment, which performed better than expected, as the recovery within the building sector began one quarter earlier than anticipated.  Nearly all performance within India was attributed to the Industrials sector, specifically holdings in the engineering and construction segment.

In South Korea, the Strategy’s underperformance was due to stock-specific news within the Financials sector, where a decrease in third quarter profits caused shares of many firms in the sector to decline.  Nearly all the underperformance within South Korea was attributed to the Financials sector, specifically holdings in financial services stocks.

NOTES

Sources: Driehaus Capital Management LLC, FactSet, Morgan Stanley Capital International and Standard & Poor’s Global Industry Classification Standard, Russell Indices, and the Wall Street Journal.

The performance numbers represent a composite of emerging markets growth accounts managed by Driehaus Capital Management LLC.  These numbers are estimated for the period as all underlying accounts have not yet been reconciled. All rates of return include reinvested dividends and other earnings and are net of fees and brokerage commissions. The performance data shown above represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted.

The Morgan Stanley Capital International Emerging Markets Growth Index (MSCI Emerging Markets Growth Index) is a subset of the MSCI Emerging Markets Index and includes only the MSCI Emerging Markets Index stocks which are categorized as growth stocks. The Morgan Stanley Capital International Emerging Markets Index (MSCI Emerging Markets Index) is a market capitalization-weighted index designed to measure equity market performance in 27 global emerging markets. 

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