From Martin J Siegel

November 18, 1998

From Martin J Siegel

Business Plan

1. Introduction Emerging global markets present investment opportunities for long term growth and capital appreciation. Portfolio diversification is achieved through investments in markets not highly correlated to the major world equity and bond markets. Growth is achieved with the careful selection of companies that will be the beneficiaries of both domestic and international expansion in the future.

In the nineteen seventies the emerging companies were Sony, Fuji and Toyota. Their names were not household words, nor were their stocks widely held by foreigners. (that was the period of Interest Equalization Tax when any American purchasing a foreign stock or bond had to pay a US Tax of 11.25%). The eighties saw stocks like Telefonos de Mexico trading at seventeen cents and in the nineties Telebras in Brazil was a $1.00 stock.

As emerging countries mature and grow, future opportunities are found in the new equity markets that have begun to form and develop. I have spent almost thirty years studying, visiting, trading, speaking about and investing in the emerging marketplace. Viewing the world today I find that there are more opportunities for growth and investment than ever before.

Emerging markets require a different mindset from investing on the New York Stock Exchange. In many countries the fear of foreigners taking control of their companies brings about legislation limiting the ability of foreigners to enter the marketplace. For example, in the seventies, foreigners could not own more than 25% of a Japanese company and in Sweden you could only buy with blocked Krona. In time these barriers come down, but they do present an obstacle to investing. The number of shares that trade on a daily basis is often small, requiring patience in purchasing them and even more patience when you plan to sell. I have found that the information and trading is best done using domestic brokers rather than using the global investment bankers of the investment community. That requires trips and meeting and getting to know these people so that a trust can be developed.

Emerging markets are volatile. It was not uncommon in the early nineties for the Brazilian stock market to move seven or eight percent a day. The value of reading the balance sheets of many of these companies is suspect, but the plus side is that you can get to meet with the president of the company and have very frank discussions about his business and his future plans.

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In most cases there are no ADR's or GDR's in emerging securities and a global custodian (usually Citibank) has to be hired. Even where the ADR's do exist, it is usually better to purchase the securities in the country of origin rather than on the NYSE or NASDAQ

This is not meant to be an allinclusive list of caveats. There are, of course, additional risks when you invest in the emerging marketplace. But the rewards far outweigh the risks of doing business and I believe that with my experience in this area, I can minimize the risks that exist.

I began trading international equities in 1970 when I joined Donaldson, Lufkin and Jenerette after receiving my MBA from Columbia University. In 1973 1 joined Salomon Brothers to set up, trade and manage an international equity department. In 1986 my duties were expanded to include constructing (with Lazlo Biryini) and running the SalomonRussell International Equity Index. In 1990 my duties were again expanded when I was given $100 million to build a Latin American equity proprietary book.

What are the return prospects for an investment in emerging markets? The Salomon Brothers proprietary trading book that I managed increased from $100 million to $340 million over a period of two and a half years, producing a compound annual return in excess of 6(ft. Market conditions are unlikely to present an opportunity for comparable performance, but industry players predict that if current stabilization trends can continue, returns in the sector may significantly outperform both the US and the European equity markets.

For the period from January 1988 through the handover of Hong Kong to the Chinese Government in July of 1997, the MSCI Emerging Markets index increased 454%. Over the same period, the S&P index returned roughly 280%, and the MSCI EAFE (the non US developed market) returned roughly 85%. On an annualized basis, the Emerging Markets index returned 17.2%, compared with 11.4% for the S&P 500, and 6.7% for EAFE.

Since the Hong Kong handover, however, and the Thai devaluation that followed the week after, the return profile has almost exactly reversed. Emerging markets lost roughly 500/6 of their value in the next 16 months, while the S&P 500 gained roughly 25% and EAFE remained roughly unchanged.

This proposal does not mean to imply that going forward, emerging markets will outperform the OECD benchmarks by the same magnitude. But the proposal does mean to suggest that the current weakness in emerging markets represent an attractive entry point into an asset class with a history of attractive returns at a moment when these markets are outoffavor and undervalued.

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In many ways, 1999 will represent a unique opportunity for investment in the emerging markets. As opposed to previous points in history, capital markets around the Third World today have reached an unprecedented level of legal and technical sophistication, with several thousand companies now publicly traded and considerably more simplified and transparent trading procedures.

On a fundamental basis, valuations in emerging markets have in many ways returned to the levels of more than a decade ago, in spite of several years of healthy economic and earnings growth and a steady decline in global inflation rates that has brought long term US interest rates to their lowest level since the 1973 oil shock.

The Telebras group, for example, which remains the largest single component of the emerging markets index, trades at roughly 7 times 1998 earnings, compared with 18 times for ATT, 20 times for Bell Atlantic, 26 times for Deutsche Telecom, and 33 times for NTT. Consensus estimates for Telebras forecast 19% longterm earnings growth, against an average of 912% for its OECD comparables. Similar comparisons are available for other industries, such as banking, natural resources and airlines.

I have traveled extensively, believing that you have to touch and feel and markets and the stocks that you invest in. In 1979 1 took a group of senior portfolio managers with me to Argentina, Brazil and Mexico to view those emerging markets and I continued this practice throughout my career at Salomon Brothers.

Although Long Term Capital had not previously made unhedged equity investments, I was asked in May of this year to go to Saigon, Jakarta, Bangkok and Manila to search out equity investments for the firm. My report was favorably received and the firm planned to invest in certain of these markets. The plan was shelved when problems beset the firm.

II. Scope of Operation

1.  To invest primarily in emerging markets equities, with a small part possibly going into emerging market debt should the opportunity arise.

2.  To purchase stocks of companies that are listed on the local stock exchanges and not to participate in any venture capital or unlisted start up companies.

3.  To invest no more than 20% of the assets of the fund in any one country and no more than 5% of the fund in any one security.

4.  To have horizons of one to three years, looking for companies that are on a growth path. There is no plan to do day trading (i.e.: buy them and sell them quickly)

5.  To establish links with a custodian banking system and a clearing system in the United States to settle these trades.

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6.  Not to use leverage in the portfolio and to use derivatives and short selling in a limited way.

7.  Besides the emerging markets, I would suggest that we discuss the Royal Dutch/Shell spread trade along with the Unilever/ Unilever and Reed / Elsivier trades as an addon to this portfolio.

III Additional personnel need

1.  a person with strong micro views who can examine the marketplace on a stock by stock basis.

2.  a bright young person to handle paperwork and details when we are both out of the country.

IV Space Requirement

An office in either NY or Greenwich Connecticut

V. Equipment Required

Bloomberg Reuters Phones Fax MachinesComputers

VI. The Fund

I would manage money exclusively on your behalf. Should others wish to eventually contribute to the fund, it would occur only with your approval. Location and structure of the fund would be your decision.

VII. Size of the company and fee structure

The company would be funded with $100 million dollars. Because of the fragility of the emerging markets, I would anticipate that it might take 3 to 6 months before we were fully invested. On the investment of $100 million the management fee would be 1%, with a profit participation of 15% of the annual growth over the libor rate. If you were to create the fund with less than $100 million the management fee would be scaled proportionately.

VIII Conclusion

The combination of increasingly deep and sophisticated markets, low valuations, and low US interest rates bodes extremely well for emerging markets as an asset class. While management and political risks are still very serious concern, the upside scenario at this point in time is probably as attractive as at any point in the past decade.