Frontier Asset Management Value versus Growth Investment Strategies in Mexico Robert Gordon Rick Kahn David Pykon Manny Teixeira Ken Weinberg

Objective To develop an investment strategy that is able to consistently outperform the Mexican index by shifting between value and growth portfolios.

Methodology Analysis based on univariate sorts of 60-80 stocks for two variables (P/B & P/E) into high, medium & low fractiles Utilized monthly data from 1991-1997 Assume low price-to-book = “value portfolio” Assume high price-to-earnings = “growth portfolio”

Mexican Economy (1991-1997) Average returns of 29% from 1991-1993 Political Stability/Announcement of NAFTA 12/94: Economic Crisis - peso devalued Index drops over 50% over the next 3 months Average returns of -8% from 1994-1997 Hyperinflation of 40% per year from 1995-1997

General Data Observations The growth portfolio significantly outperforms the value portfolio and the index since the Mexican crisis (surprising, given the poor results in the overall market) The growth portfolio outperforms the value portfolio by 900 basis points during the 3 months following the peso devaluation in 12/94 Growth vs. value portfolio correlation = 81% Correlations to Index = 90%

Overall Results The growth portfolio exceeds the value portfolio each year and beats the index in nearly 60% of the months sampled The value portfolio underperformed on average - beating the index only 45% of the time No consistent patterns of outperformance in years following +/- 10% changes in the index portfolio The growth portfolio resulted in less volatility than the value or index portfolio

Application Should we shift assets???

Questions???