Letter to Shareholders

June 27, 2011

One Financial Place
440 South LaSalle Street, Suite 3900
Chicago, Illinois 60605-1028

 

Dear Shareholders and Friends,

Speaking on behalf of all our professionals, I want to welcome the growing number of individuals, registered investment advisors (RIAs) and investment bank clients who have entrusted us to manage a portion of their assets. Given the growth of the new Thomas White Emerging Markets Fund and our need to service an expanding number of RIAs, we have realigned our professional staff and have added to our team. Stathy White, who is President of the Thomas White Funds, has also become the manager of our new Retail Products Group. Gabriel McNerney, who recently joined the firm, has become Head of Client Relations in this group. They look forward to visiting many of you at your firms and at the industry’s various events in the coming year. In addition, we continue to add security analysts in Asia where the count of investable companies is expanding rapidly. Our Chicago and Bangalore research professionals currently search for undervalued stocks in 24 developed markets and 21 emerging market countries. They have now begun coverage of Qatar and the United Arab Emirates, given the possibility that MSCI Barra may categorize these frontier market countries as emerging market countries within their index classifications early next year.

Please note our improved Financial Professional and Institutional Investor sections on our website. Also take advantage of our many regional, country and industry reports written by our analysts located on our related Global Investing site. Together, these sites have attracted a strong following of clients who wish to stay current on a wide range of global business trends.

The World’s Economic Leadership is Transitioning:

Over the last 17 years, I have continually voiced my awe over the growth that has resulted from governments adopting market-driven approaches in the management of their economies. The conversion from European and Asian brands of socialism has benefited emerging market countries the most. In 1980, the emerging market countries we follow contained 77.2% of the world population, but produced just 23.7% of world Gross Domestic Product (GDP). By 2010, this ratio had changed to 80.7% of the population and 44.6% of the world GDP. Now, the International Monetary Fund (IMF) projects that in 2016 emerging markets countries will produce 51.5% of the world GDP. We think these trends portend many more changes to come in the future.

Regional GDP Weights of the AC World Index – 1980-2016 Weight Changes*
#	Country	1980	1990	2000	2010	2016E	1980-’16 Change
45	AC World Countries
24	Developed Markets	76.3%	74.1%	66.3%	55.4%	48.9%	-27.4%
21	Emerging Markets	23.7%	25.9%	33.7%	44.6%	51.1%	27.4%
	REGIONS
21	Europe (West & East)	36.7%	33.3%	32.4%	28.1%	24.9%	-11.8%
4	Middle East/Africa	2.2%	2.1%	1.9%	2.1%	2.2%	0.0%
2	North America	30.6%	30.0%	28.7%	24.6%	22.2%	-8.4%
5	Latin America	9.3%	7.9%	7.4%	7.2%	7.2%	-2.1%
13	Asia Pacific	21.4%	26.8%	29.5%	38.0%	43.6%	22.3%

*A region’s GDP weight in the MSCI AC World Index is based on its 2011 PPP GDP (source IMF).

Data for 2011 through 2016 are IMF projections.

Understanding the Ongoing Shift in Economic Power to Emerging Market Countries

A large population provides a country or a unified region with the potential for economic leadership. This favors the emerging market countries as they contain the great majority of the world’s population.

Using 2010 figures, the total global population share of the 21 emerging market (EM) countries was 80.7%, four times larger than the population of the 24 developed market (DM) countries (19.3%). In 1980, the difference was 77.2% versus 22.8% and using IMF estimates, the 2016 difference will widen to 81.0% versus 19.0%.

This EM/DM population spread is growing wider due to the higher birth rates in emerging market countries. From 1980 to the IMF’s 2016 projections, the EM population is estimated to grow at an annual rate of 0.7% versus 0.3% for the developed countries.

The Asia Pacific region, with 66.9% of the world’s population in 2010, is larger than the rest of the world combined. Greater Europe currently has 14.1%, the Middle East and Africa 3.5%, North America 7.2% and Latin America 8.2% of the world’s population.

Productivity Growth is the Key to Reaching a Country’s Economic Potential

Productivity in economics is defined as the amount of GDP generated by the average citizen. Currently, individuals in emerging market countries are far less productive, only generating $7,496 of GDP per person versus $38,870 in developed market countries. This difference is primarily because businesses are freer to compete in more developed countries. Emerging market countries are often loosely regulated without mature legal systems. They can also suffer from bribery, a lack of infrastructure, poor educational systems, unhealthy environments and inefficient financial markets. These problems are often caused by dysfunctional governments or where a country is ruled by leaders who discourage modernization.

By eliminating many of the above mentioned factors that limit growth, most EM countries have now improved their productivity. GDP per person comparisons between EM and DM countries over the last 35 years were as follows: $1,079 versus $10, 032 in 1980; and $7,496 versus $38,890 in 2010. Using 2016 IMF projections, GDP per person in emerging market countries climbs to $11,534 versus $47,037 in developed markets. Recently, EM productivity per person has been growing much faster than productivity in DM countries. While EM levels were just 11% of the DM level in 1980, they are now projected to rise to 25% in 2016. This sharp increase in EM productivity is clearly the main factor behind the superior EM country growth rates over the last 30 years.

As EM countries currently have over 4 times the number of people than DM countries (3,874.7 million versus 926 million), and with the EM workers rapidly narrowing the difference in their per person productivity, simple logic suggests that the EM countries may continue to gain market share from developed countries well into the future.

Could the Emerging Market Countries Gain Even More World Economic Share?

Using population as a gauge for potential economic size, the EM countries’ share of the world economy could theoretically grow to 85% over the coming 35 years. This would only be possible if their productivity rose to equal the DM level. Given the large size of the EM work force, we think this is unlikely.

Over the last 35 years, EM country productivity has grown from 11% of the DM level in 1980 to a projected 25% in 2016. The strong past EM record suggests their productivity could reach 50% of the DM level over the coming 35 years (2051). In this scenario, the EM countries share of the world economy would rise to roughly 70%.

Top 10 Countries by Projected 2016 AC World Index GDP Weight – 1980-2016 Weight Changes*
#	Country	1980	1990	2000	2010	2016E	1980-’16 Change
1	China	2.5%	4.3%	8.0%	15.5%	20.6%	18.1%
2	United States	27.8%	27.4%	26.4%	22.5%	20.3%	-7.5%
3	European Union	33.5%	30.5%	26.3%	21.4%	20.3%	-15.1%
4	India	2.9%	3.5%	4.2%	6.2%	7.6%	4.7%
5	Japan	9.8%	11.0%	8.5%	6.6%	5.7%	-4.1%
6	Russia	3.0%	2.9%	3.0%	3.4%	3.4%	0.4%
7	Brazil	4.4%	3.7%	3.3%	3.4%	3.3%	-1.1%
8	Mexico	3.3%	2.9%	2.8%	2.4%	2.4%	-1.0%
9	Korea	0.9%	1.6%	2.1%	2.3%	2.2%	1.3%
10	Canada	2.7%	2.6%	2.4%	2.1%	1.8%	-0.9%

*A region’s GDP weight in the MSCI AC World Index is based on its 2011 PPP GDP (source IMF).

Data for 2011 through 2016 are IMF projections.

Asia, Driven by China, Has Become the World’s Largest Economic Region

At a 38.0% market share, Asia is already the world’s largest economic region. Odds are high that it should continue to expand in relative economic size in the future. China, currently 49.4% of the Asian economy, should become the country with world’s largest economy by 2016, according to IMF estimates.

There is no question that in terms of economic growth, China has been the brightest star among both developed and emerging market countries over the last 30 years. Responding to a failed economic scheme that had destroyed both its economy and its capacity to feed its citizens, Chinese leaders in the mid-1970s orchestrated a philosophical U-turn, embracing a “unique Chinese version” of a free market economy.

China Should be the Largest Economic Power by 2016

In 1980, China, with the world’s largest population, also had the world’s lowest productivity. Despite desperate times, China’s huge population endowed it with the potential to become the world’s largest economy. During the 1980’s, China’s GDP growth recovered to rank #2 among the 45 countries in the MSCI All-Country Index. By the 1990’s, China’s rank rose to #1, and continued to hold the top slot in the last decade. Currently, China is projected by the IMF to rank #1 over the next five years. This growth resulted from a surge in productivity of the Chinese worker, rising each decade sequentially from $251 in 1980, to $796 in 1990, $2,378 in 2000 and $7,519 in 2010. The Chinese workers productivity is projected to rise to $13,729 in 2016.

Multiplying China’s huge population count by its surging GDP generated per person has had the effect of exploding its share of the world economy from 2.5% in 1980, to 15.5% in 2010.

Note that China’s projected share of the world economy at 20.6% in 2016 should enable it to take the crown from United States, topping the U.S. projected 20.3% weight, as estimated by the IMF.

Assessing the Risks in U.S. Dollar Denominated Assets

We believe that the U.S. dollar will continue its long-term decline in value versus most other developed and emerging market country currencies, and that global investors should guard against this possibility.

Please do not interpret our attitude toward the long-term decline of the dollar as a suggestion that we can predict year-to-year currency movements. In fact, we recognize that in sharp equity market declines, the dollar often strengthens.

Still, America’s image as a disciplined country worthy of emulating is already fading. While European countries are making the necessary but painful decisions to raise taxes, reduce personal and government spending to sustainable levels and to repair their balance sheets, America is doing just the opposite. Does this sound like a nation other newly developing countries should emulate?

Please do not interpret our attitude toward the long-term decline of the dollar as a suggestion that we can predict year-to-year currency movements. In fact, we recognize that in sharp equity market declines, the dollar often strengthens.

Our Portfolio Strategy At Thomas White, we strongly believe investors will be well served owning equity portfolios of sound companies that are broadly diversified across the world’s regions and industries. While equities are the most volatile asset class, history shows they have produced superior, inflation-adjusted returns over the long term. Well-run companies with prudent balance sheets have demonstrated the ability to survive a wide range of economic and business storms and come back more valuable than before. By being able to cope with these challenging times better than their weaker competitors, these companies should be able to use their advantages in scale, lower costs and greater access to capital to increase market share in their industries and acquire valuable companies or divisions at fire sale prices. Like us, company managers with long-term horizons recognize that difficult environments may offer exceptional buying opportunities.

Your Portfolio Manager and Others in our Firm are Fellow Fund Shareholders To demonstrate my personal belief in our investment approach and in an effort to avoid any perceived conflicts of interests with shareholders, I keep 100% of my personal stock market investments in the three Thomas White Funds, including the new Thomas White Emerging Markets Fund.

I encourage you to stay abreast of the important events occurring in the nearly fifty countries covered by our analysts. Their observations are available at www.thomaswhite.com. You may subscribe to this content on the site.

Enjoy a pleasant summer,

 

Thomas S. White, Jr.

Chairman and Portfolio Manager

 

Past performance is not a guarantee of future results.

Opinions expressed are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

Must be preceded or accompanied by a prospectus.

Mutual fund investing involves risk. Principal loss is possible.

Diversification does not assure a profit nor protect against loss in a declining market.

The MSCI All Country World ex U.S. Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States. One cannot invest directly in an index.

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