Absolute Return: The way to make money in

Emerging Markets?

Unconventional Thinking -
BSF Emerging Markets Absolute Return Fund

Sam Vecht, Head of BlackRock’s Fundamental Emerging Markets Specialist Team

Luxembourg, 22 January 2013

For professional clients / qualified investors only

How Do I Make Money in Emerging Markets?

The ability to generate positive returns irrespective of market conditions BSF Emerging Markets Absolute Return
Fund
• Fully flexible investment approach
• Experienced team with proven track record in long/short strategies Investment
Global Emerging Markets
Region

Manager Sam Vecht

The smoothing of volatility through UCITS hedge-fund structure Co-manager Henry Wigan

• Disciplined trading with position review limits LARGE

• Risk independently monitored by BlackRock’s market-leading RQA Team 40-70
MID positions

SMALL
The freedom to focus on best ideas Absolute Return
Style
• Identifying the best opportunities within Emerging Markets, independent Long/Short
of arbitrary benchmark constraints Liquidity Daily Dealing
• Exploiting vast market inefficiencies
Exposure Net -10% to +20%

Leverage Gross 100% to 150%

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Emerging Markets: Zero Return over Five Years

The Index has struggled to generate positive absolute returns…

1400
1200
1000
800
600
400
200
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
MSCI Emerging Markets Index (USD)

…And most managers have struggled to generate positive relative returns

Time Period MSCI Emerging Markets Average EM Manager % of Managers Underperforming Index

1 year 18.2% 16.7% 64%

3 years 14.7% 8.9% 75%
5 years -4.5% -12.3% 78%

A New Approach is Needed…

Source: MSCI, Bloomberg, BlackRock 31st December 2012
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The Perception-Reality Gap: A Great Opportunity to Make Money
What is Actually Correlated in Equity Markets?

Is it GDP and developed market performance…? No Is it GDP and emerging market performance…? No
0,5 12,0%
South Africa Brazil R2 = 0.07
0,4 Chile
10,0% Hong Kong

Real return 1980-2010

GDP Growth Per Capita GDP Growth India
0,3
8,0%
Correlation

0,2
Mexico Taiwan
0,1 6,0%
Singapore
0 Korea
4,0%
-0,1 Argentina
Thailand
-0,2 2,0%

-0,3
0,0%
10 11 12 15 18 20 21 23 25 26 29 32 35 42 43 105
1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 7,0%
Years to 2004 Real GDP growth 1980-2010

Is it GDP and dividend growth…? No Is it EPS growth and dilution…? Yes!

3 35 China
R2 = 0.0033 R2 = 0.6567
2 30
Real Dividend Growth

1 25

0 Annual Dilution 20
Russia
-1 15

-2 10 India

-3 5 Past 40 years where available based on

Each point is an individual market (16 in total) datastream indices
-4 0
1.5 2.0 2.5 3.0 3.5 4.0 4.5 0 10 20 30 40 50 60
Real GDP Growth Average Earnings Growth

Source: S&P Morgan Stanley, DataStream

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Many Investors Perceive “Growth” as a Winning Strategy - Reality is Different

Emerging Markets: Value has outperformed despite the focus on ‘growth’

• Although the Team are not ‘value’ investors, a focus on valuation is essential

• Empirical evidence shows that even poorly run state-owned companies outperformed ‘stories, themes & dreams’ due to initial
undervaluation

• The difference between a good stock and a good company often lies in the valuation

600
Performance (re-based to 100)

500
471

400 421
343
300

200

100

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

MSCI Emerging Markets Value MSCI Emerging Markets MSCI Emerging Markets Growth

Source: Bloomberg, Morningstar 31st December 2012

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A Wider Perspective Reveals Market Inefficiency (I)

Price to free cash-flow* vs. Price to earnings ratio*, MSCI GEM

• Focus on cash-flow paints a different story to earnings and undermines a typical Emerging Markets sales pitch

• Obsession with PE ratios masks the reality of Emerging Markets investing

• The BlackRock Emerging Markets Specialist Team seeks to discover opportunities in the ‘perception-reality gap’
70

60

50

40

30

20
The ‘Perception-Reality Gap’
10

Price/Free Cash Flow Price/Earnings

Optical growth not reflected in real cash-flow

Source: BlackRock Citi, 31st December 2012 *Trailing data

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 A Wider Perspective Reveals Market Inefficiency (II)

Valuations vs History

• Perceived ‘safe havens’ are the most expensive that they have ever been

• ‘Safe havens’ has become a euphemism for crowded trades – one of the quickest ways to lose money
100% 99% 99% Expensive
100%
90%
80%
Percentile Ranking

70% 65%
60%
50% 47%

40% 36%
33% 32%
30% 27%
22%
20% 16%
13%
10% 4%
0%
Cheap

Crowded and expensive assets are rarely safe investments

Source: Bloomberg, DataStream, BlackRock 31st December 2012.
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A Wider Perspective Reveals Market Inefficiency (III)

EcoPetrol: Bigger than almost all of Eastern European markets combined

• Is the valuation of a Colombian, 90% state-controlled oil company fair, relative to the global opportunity set?

• Looking beyond headlines and the mindless 24-hour news-cycle uncovers opportunities

Fashions change: Consequences of capital misallocation do not

Source: Blackrock, Bloomberg, December 2012

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 “Quality”: Now Is Not The Time To Buy

Trailing price to book – MSCI Emerging Markets

Price to Book
3,5
Expensive
3,0

2,5

2,0

1,5

1,0

0,5 Cheap
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Market Lowest Quality Below Average Quality

Average Quality Above Average Quality Highest Quality

Source: BlackRock, RQA, November 2012

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Global Perception is Contradicted by Market Realities

Performance of Brazilian, Chinese & Greek markets 2012 (USD terms)

Countries with low or even negative free cash flow yields, such as Brazil and China, have underperformed not only the emerging
market universe but even Greece

140

130
Performance (re-based to 100)

120

110

100

90

80

70

60
déc. 2011 févr. 2012 avr. 2012 juin 2012 août 2012 oct. 2012

Brazil China Greece

Direction of travel is more important than the current location

Source: Bloomberg. Bovespa, Shanghai A-Share and Athens Stock Indices, USD terms rebased to 100, December 2012

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The Hedge Fund Structure Built For These Times

Realised Volatility
BSF Emerging Markets Absolute Return 6%
MSCI Emerging Markets Index 22%

Max draw-down and max-gain, per annum (MSCI Emerging Markets)

120% 115%

100%

80%
64% 59%
60%
37% 37% 39% 34% 35%
40% 34%
21% 21%
20%

0%

-20% -11%
-12% -20% -13% -18%
-25% -22%
-40% -30% -31%
-35%
-60%
-64%
-80%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

High volatility; a challenge for the conventional approach,

an opportunity for BSF Emerging Markets Absolute Return
Source: BlackRock, RQA, Bloomberg
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Defined Philosophy: Dedicated To Discovering Good Stocks*

Our Approach Conventional Approach

Economics Themes
- A sound economy is essential to corporate success - A means for justifying overvalued stocks

History & Politics

Short-term newsflow
- Understanding context is vital to making clear
- Addictive and leads to overtrading
judgements

Cashflow Growth GDP Growth

- Drives equity returns - Does not necessarily translate to market returns

Financial Statements Broker research

- Due-diligence is rewarded - Convenience at the expense of analysis

Valuation Momentum
- Proven determinant of Global Emerging Market returns - Leads to crowded trades

Deploying your capital where it is required AND respected

* These are not necessarily the same as good companies

“If everyone is thinking alike, then somebody isn’t thinking “
- George S Patton

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 Emerging Markets Specialist Team: Performance

BSF Emerging Markets Absolute Return Fund

Fund Name Since inception return
BSF Emerging Markets Absolute Return1 +2.6%
1 Inception 15th November 2012 to 31st December 2012, inclusive of expenses, gross of fees

Emerging Market Mutual Funds

3 year percentile
Fund Name
ranking
BlackRock Emerging Markets Fund, inc2 19%
BGF Emerging Europe Fund3 27%

2Peer group Lipper Emerging Market Funds to February 2012 when Sam Vecht stopped managing the portfolio
3Morningstar Emerging Europe peer group (EMEA Funds) to December 2012

Emerging Frontiers Hedge Funds

Fund Name Since Inception return

BlackRock Emerging Frontiers Fund4 +45.8%
Segregated Account – Global Remit5 +25.0%

4Performance shown relates to the BlackRock Middle East and North Africa Fund launched in 2007 which has a different investment universe to the BlackRock Emerging Frontiers
Fund. Performance is shown inclusive of expenses, gross of fees. The Fund merged with the Eurasian Frontiers Fund to form the BlackRock Emerging Frontiers Fund on the 1st
October 2011. As at 31st December 2012 5 Launch date 7th September 2011. As at 31st December 2012

Past performance is not a guarantee of future results

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 BSF Emerging Markets Absolute Return: Portfolio Positioning

Country allocation (gross) Sector allocation (gross)

Turkey; 11% Africa; 2% Utilities; 2%
Austria; 3% Cons Disc;
Telecom; 8%
12%
Taiwan; 6% Brazil; 12% Materials;
12% Cons Stap;
4%
China; 7%
South Africa;
10% Colombia; Energy; 17%
6% IT; 10%
Czech; 3%
Hungary; Health; 2%
Russia; 13%
4%
Poland; 4% India; 5%
Malaysia; Korea; 3% Financials;
Mexico; 4% 5% 29%

Country allocation (net) Sector allocation (net)

10% 20%
8% 15%
6%
10%
4%
2% 5%
0% 0%
-2%
-5%
-4%
-6% -10%
-8% -15%

Source: BlackRock 31st December 2012. Gross Exposures are calculated as a percentage of total gross. Portfolio weights do not necessarily represent current or future portfolio holdings.
*Companies which derive revenues from more than one Frontier Market

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Appendix
BlackRock Emerging Markets Specialist Team

Sam Vecht Henry Wigan

Lead manager Co manager

12 years experience 9 years experience

Marc Cox Fiona Ellard Emily Fletcher Gordon Fraser Denis I. Kalugin

Strategist (11) Strategist (26) Africa (6) Asia (6) Frontiers (1)

David Reid Charlie Shilling Karthik Sankaran Henry Wigan Zhangming Du

Russia/Commodities (7) Dealer (24) North Asia/GCC (6) LatAm/Macro (9) China (1)

In addition, leveraging the wider BlackRock network

 GEM - 4 investment professionals London/New York  Natural Resources

 Latin America - 4 investment professionals, Princeton/S. Paulo  Global Equities/ European Equities
 Asia Pacific - 10 investment professionals, Hong Kong  Emerging Markets Debt
 India - 6 investment professionals, Mumbai  BMACS
 SAE - 7 investment professionals, San Francisco  Risk & Quantitative Analytics
 Equity Capital Markets Team

Source: BlackRock December 2012. (x) denotes years of experience

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BSF Emerging Markets Absolute Return: Portfolio Positioning

Top Longs Top Shorts

Weight Weight

Mail.ru 3.7% EEMEA Energy -4.1%

MOL 3.5% North Asia Materials -3.2%

TPK 3.3% EEMEA Consumer -3.2%

Vimpelcom 2.9% EEMEA Materials -3.2%

Hynix 2.8% LatAm Financial -3.1%

Tata Motors 2.8% LatAm Energy -3.1%

Komercni 2.8% Asian Consumer -2.5%

Raiffeisen 2.6% ASEAN Financial -2.4%

Itau 2.5% EEMEA Telecom -2.1%

Gazprom 2.5% ASEAN Health Care -2.1%

Source: Blackrock 31st December 2012. Portfolio weights do not necessarily represent current or future portfolio holdings. Reference to the names of each company mentioned is
merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.

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BSF Emerging Markets Absolute Return: Facts and Figures

Long Short Gross Net

Total 46% -50% 96% -4%

Characteristics Typical Current Country analysis

Gross exposure range 100% - 150% 96% Countries in theoretical universe 21

Net exposure range -10% - +20% -4% Country positions 15 – 21 (current 16)

Number of positions 40 - 70 41 Country shorting experience* 33

Maximum single country exposure 20% 11%

Gross & Net Exposure
Maximum position size (long) 5% 4%
Maximum position size (short) 5% 4% 120%
100%
Number of long positions 20 - 35 19
80%
Number of short positions 20 - 35 22 60%
Investment horizon (long) 6 -12 months 40%

Investment horizon (short) 3 - 6 months 20%

0%
Cost of borrow (GDR) 1% Gross Net
-20%
Cost of borrow (local) 3% - 5%
Nov-12 Dec-12

The team responsible for managing the BSF Emerging Markets Absolute Return Fund has direct experience of taking short positions in the following jurisdictions: Abu
Dhabi, Bahrain, Brazil, China, Colombia, Czech Republic, Dubai, Egypt, Hungary, Israel, Jordan, Kazakhstan, Kuwait, Lebanon, Malaysia, Mexico, Morocco, Oman,
Poland, Qatar, Romania, Russia, South Africa, Taiwan, Turkey, Vietnam. In addition, we have shorted companies listed in developed markets which have the majority of
economic activity in the following countries: Iraq, Libya, Mali, Syria, Tanzania, Ukraine, Sierra Leone
Current positions are as at 31st December 2012 and do not necessarily represent current or future portfolio positions. Typical portfolio characteristics are for illustrative
purposes and are subject to change in view of prevailing market conditions

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BlackRock Emerging Markets Specialist Team: Investment Process

Emerging Market
Market Cap filter $1bn and $5m Liquidity filter*
Universe

Macroeconomic Research Systematic proprietary macroeconomic and political analysis

On-the-ground scrutiny, cash flow focus

Company Research

Rigorous debate, buy and sell discipline

Team Review

Industry leading risk systems, positions are deliberate diversified and

Risk Analytics scaled

40-70 Positions*
Portfolio
*Values are typical and may change with market conditions

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Macroeconomic Research: Driving Country Views

Key macro inputs Country matrix

(1) Political Insight

+
(2) Macroeconomic Analysis
(cf. Macro Insight Presentation)

+
(3) BlackRock Network

Top-down view provides framework for intensive bottom-up analysis

Source: BlackRock 31st December 2012

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Company Research: Time On The Ground Is Invaluable

- Over 1,000 meetings per annum

- High level diplomatic, political & corporate access
- Further scrutiny undertaken through meetings with company customers, competitors and suppliers

David Reid with former Russia

Sam Vecht meets Turkish
Minister of Finance, Alexei Kudrin
deputy PM, Bülent Arınç

Gordon Fraser with inactive

Kobelco heavy equipment in
Ordos, Inner Mongolia, China

* Since 2010, the GEM Team has conducted over 1,500 additional meetings with companies in Emerging Markets. Excludes conference calls. 31st December 2012

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BlackRock Emerging Markets Specialist Team: How we pick stocks

Long Positions Short Positions

 Efficient use of capital  Poor cash flow generation

 Positive operating leverage  Unsustainable margins

 Earnings power above market expectations  Aggressive accounting

 Turnaround situations  Structural decline

 Unrecognised opportunities  Crowded trades

Best ideas result from intense team debate and review

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Portfolio Construction: Appropriately scaled positions

High liquidity Lower liquidity Lower liquidity

AND OR AND
Low volatility Higher volatility Higher volatility
1 2 3
Expected return

>50% A 3%-5% 2%-3% 1%-2%

30%-50% B 2%-3% 1%-2% 1%

10%-30% C 1%-2% 1% Typically zero

Example Positions

1 2 3

A TPK Garanti Bank (ASEAN Health)

B Komercni (LatAm Consumer Staple) -

C (EEMEA materials) (EEMEA Financials) -

( ) = SHORT

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Risk Analytics: Deliberate Exposure, Diversified Portfolio

- Independent and continuous risk monitoring by Risk and Quantitative Analytics (RQA) Team
- Focus on reduction of unintended exposures
- Managing risk a core part of team DNA

Impact: Real-time desktop app Sample risk decomposition

Stock

Market

Industry

Style
Country

Holistic understanding of risk integral to portfolio construction

Source: BlackRock, Impact RQA

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 Differentiated Strategies for Discerning Investors

Typical Gross Typical net

Fund Name Ticker AuM Strategy Top 3 Countries Capacity
Exposure exposure
• Russia 59%
MIGSEEI
BGF Emerging Europe $2.3bn Long-only • Turkey 14% $5bn 95% - 100% 98%
LX
• Hungary 8%
• Russia 66%
The Eastern European Trust EST LN $200m Long* • Turkey 14% N/A 95% - 110% 95%
• Hungary 9%
• Nigeria 16%
BlackRock Frontiers
BRFI LN $130m Long* • Qatar 13% c.$300m 95% - 110% 95%
Investment Trust
• Kazakhstan 9%
Separate Account – Global
N/A $45m Long/Short - N/A 100% - 160% 50-90%
Remit
• Saudi 8%
BlackRock Emerging BLKEFUI
$65m Long/Short • UAE 8% c.$300m 100% - 180% 40%
Frontiers Fund KY
• India 7%
• India 5%
BSF Emerging Markets BSEAX2U
$7m Long/Short • Russia 5% $2bn 100% - 150% 5%
Absolute Return Fund LX
• Korea 3%

Source: BlackRock, 31st December 2012. *Closed-end, London-listed investment trust with limited flexibility to take short positions.

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Notes

The following notes should be read in conjunction with the attached document:

1. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Services Authority. Registered office: 12 Throgmorton
Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock
is a trading name of BlackRock Investment Management (UK) Limited.

2. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. All financial investments
involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.
Changes in the rates of exchange between currencies may cause the value of investments to go up and down. Fluctuation may be particularly marked in the
case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

3. Mandates we manage may be exposed to finance sector companies, as a service provider or as counterparty for financial contracts. In recent months, liquidity
in the financial markets has become severely restricted, causing a number of firms to withdrawn from the market, or in some extreme cases, becoming
insolvent. This may have an adverse affect on the mandates we manage.

4. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being
made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily
reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

5. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been
prepared in connection with any such offer.

6. This material is for distribution to Professional Clients (as defined by the FSA Rules) and should not be relied upon by any other persons.

7. Subject to the express requirements of any client-specific investment management agreement or provisions relating to the management of a fund, we will not
provide notice of any changes to our personnel, structure, policies, process, objectives or, without limitation, any other matter contained in this document.

8. No part of this material may be reproduced, stored in retrieval system or transmitted in any form or by any means, electronic, mechanical, recording or
otherwise, without the prior written consent of BlackRock.

UNLESS OTHERWISE SPECIFIED, ALL INFORMATION CONTAINED IN THIS DOCUMENT IS CURRENT AS AT 31 st December 2012

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