1. MARKET OVERVIEW
Wall Street reeled from the worst liquidity crunch in nearly ten years in August. Investors
reassessed their risk tolerance amid hopes for a Federal Reserve rate cut and fears stock market
dislocation and the housing bust would cause a recession.
A sharp acceleration in residential mortgage defaults triggered the turbulence. Increasing
defaults undermined the value of mortgage-backed securities owned by major investment
banks, including a few highly leveraged hedge funds. As the value of their portfolios deterio-
rated, the funds were swamped with broker margin calls and redemption requests. To raise cash,
they had to sell equities. Reports of massive, irregular share price movements swirled down Wall
Street. The Wall Street Journal ran a front page editorial on quantitative asset managers experi-
encing abnormal results due to the difficulties inherent in modeling extremely rare, highly
correlated panic events. As risk aversion snowballed, the commercial paper lending market
seized up. Healthy businesses needing short-term financing couldn’t get it. Seeking shelter in
government-backed debt, investors bid down the yield on Treasury bills the most since the
market crash of 1987.
In five trading days through August 15, the Dow lost 796 points, a near 6% drop. The S&P 500
approached technical correction territory, down almost 10% from its July 19 record. Gains for
the year were gone. On August 17, in an
uncommon, unscheduled meeting, the
Federal Reserve intervened. Noting risks
had “increased appreciably,” Chairman Ben
Bernanke cut the discount window lending
rate from 6.25% to 5.75% and extended
loan terms from one to thirty days. Buoyed
but gun-shy, Wall Street’s bulls regained
their footing, closing August moderately
ahead of where they started.
From a fundamental standpoint, August
was fairly good. Second quarter GDP
growth was revised up to 4.0%, while July
core inflation fell within the Fed’s 1-2%
comfort zone at 1.9%. Thomson Financial
reported S&P 500 2Q07 earnings growth of
7.8%, with 96% of companies reporting.
Industrials and consumer discretionary
companies saw the strongest and weakest
results, respectively.
A U T U M N 2 0 0 7
at the margin
G L O B A L E Q U I T Y M A R K E T O V E R V I E W
IN THIS ISSUE
Perspective . . . . . . . . . . . . .2
Equity Update . . . . . . . . . . .2
Firm Update . . . . . . . . . . . .3
Portfolio Manager Insights:
Emerging Markets
Systematic . . . . . . . . . . . .4
Feature:
An Interview with Dr. Arthur
Laffer . . . . . . . . . . . . . . . .6
Focus:
Mexico — Six Months South
of the Border . . . . . . . . . .8
Chartbook . . . . . . . . . . . . .12
August YTD
S&P 500 1.5 5.2
NASDAQ Composite 2.0 7.5
Dow Jones Industrials 1.1 7.2
MSCI EAFE -1.5 7.8
MSCI EAFE Growth -1.0 10.3
MSCI EAFE Value -2.1 5.3
MSCI EM -2.1 21.4
MSCI ACWI xUS -1.5 10.5
MSCI Europe -1.1 9.3
MSCI Japan -2.9 -0.3
Russell 1000 1.4 5.3
Russell 1000 Growth 1.6 8.2
Russell 1000 Value 1.1 2.5
Russell Midcap 0.2 6.0
Russell Midcap Growth 0.5 9.1
Russell Midcap Value -0.3 2.3
Russell 2000 2.3 1.4
Russell 2000 Growth 2.5 6.3
Russell 2000 Value 2.0 -3.1
ML High Yield Master II 1.1 0.9
As of 31-Aug-07
Market Performance
VOL. 11 NO. 8

2. PERSPECTIVE
Horacio A. Valeiras,
CFA
Managing Director
and Chief Investment
Officer
EQUITY UPDATE
GROWTH/VALUE EQUITY
Growth outperformed value a fifth consecutive
month in August, the longest such stretch since
February 2000. As investors balanced liquidity con-
cerns against the possibility of a Federal Reserve
rate cut, stocks in the information technology,
consumer discretionary and health care sectors
saw the best results. Combined, those three cate-
gories account for more than half of the market
capitalization of the Russell 1000 Growth, Russell
Midcap Growth and Russell 2000 Growth indexes.
Together, they account for between one-sixth and
one-third of the market capitalization of equiva-
lent Russell value indexes.
LARGE/MID/SMALL EQUITY
After falling hard in July, small company shares
bounced back last month, and in general outper-
formed mid- and large-sized peers. The center of
the capitalization spectrum, mid-cap stocks, have
not led on a monthly basis since February.
Regardless, a combination of strong gains during
up months and restrained losses during down
months has pushed the asset class to the fore on a
year-to-date basis.
INTERNATIONAL EQUITY
International equities skidded a second month in
August, as the global liquidity crunch drove a flight
to quality. Liquidity challenges have resulted in
hardship for several major international finance
houses, including France’s largest bank, BNP
Paribas SA; two large German lenders, Landesbank
Sachsen Girozentrale and IKB Deutsche
Industriebank; and Australia’s biggest securities
firm, Macquarie Bank. In general, stock losses in
Asia were worse than in Europe and value shares
underperformed growth shares. Developed mar-
kets were more insulated from the retreat than
emerging markets. The dollar gained versus the
euro but dipped against the yen, as investors
unwound bets the Japanese currency would
remain cheap.
2
 Copyright 2007
....Nicholas-Applegate
....Capital Management
As summer draws to its unofficial close, we
can rest assured that August lived up to its
past reputation. A month in which investors
expect well-earned peace and quiet during
vacations has once again roiled markets. The
subprime mess, weak housing, quantitative
product failures, and carried interest taxation,
to name a few topics, combined to make for
a very volatile month. There were winners and
losers, as always, which you can read about in
the Market Overview section.
Your assets invested with Nicholas-Applegate
behaved as expected in this market. Volatility
during the month caused large swings in rela-
tive performance. After all was said and done,
most of the strategies we manage underper-
formed for the month, but are ahead for the
quarter to date. We will send communications
from each investment team about your partic-
ular investments in the next few days.
Are we expecting this volatility to continue?
Yes, but not at the levels seen unless the
Federal Reserve decides not to cut interest
rates. Our economic and profit growth out-
looks for the world markets remain the same
as noted in this column over the past year.
We believe the U.S. economy is in a mid-cycle
slowdown, magnified by a weak housing
market and the impact of seventeen interest
rate increases over the past four years. Other
economies are behaving well. We expect cor-
porate profits to grow by 5-7% in the U.S.
and by approximately 10% outside the U.S.
We also expect the Fed to cut the fed funds
rate by 50 basis points before year end, and
the European Central Bank to raise rates by
25. If the Fed rate cuts don’t come through,
we can expect a return to the dog days of
summer during the fall.

3. FIRM UPDATE
At The Margin is a
monthly publication of:
Nicholas-Applegate
Capital Management
600 West Broadway
San Diego, CA 92101
PHONE (800) 656-6226
(619) 687-8000
FAX (619) 744-5545
3
Steven Brown — Vice President, Equity Trader, International — Steven Brown runs the trading
desk in our London office. Prior to Nicholas-Applegate, Steven worked for AllianceBernstein;
European Financial Data Systems; The Bank of Nova Scotia in their London Banking Division; and
the Royal Bank of Scotland. Steven has twelve years of investment industry experience.
Blake H. Burdine — Vice President, Analyst, US Micro/Emerging Growth — Blake Burdine joined
with research responsibilities for the US Micro/Emerging Growth teams. Prior to joining Nicholas-
Applegate, Blake worked for Duncan-Hurst Capital Management; CapitalWorks Investment
Partners; USAA Investment Management; Credit Suisse First Boston; Jefferies & Company; and
Howard Weil, Labouisse, Friedrichs. Blake earned his M.B.A. at The University of Texas, McCombs
School of Business, and B.A. from The University of Texas. Blake has fifteen years of investment
industry experience.
Robert S. Marren — Managing Director, Portfolio Manager, US Micro/Emerging Growth —
Robert Marren joined with portfolio management and research responsibilities for the US
Micro/Emerging Growth teams. Prior to joining Nicholas-Applegate, Bob was Director of Research
and Portfolio Manager for micro-cap growth equities for Duncan-Hurst Capital Management. He
was also on their Management Committee, and originally joined Duncan-Hurst as a small-cap
analyst in 1993. He was previously at Hughes Aircraft Company; Security Pacific Merchant Bank;
Hambrecht & Quist, Inc.; and VLSI Technology, Inc. Bob earned his M.B.A. at Duke University,
Fuqua School of Business, and his B.A. at the University of California, San Diego. He is also a
Trustee for the UC San Diego Foundation, and currently serves as chair of their Investment
Committee. Bob has seventeen years of investment industry experience.
Lu Yu, CFA, CIPM — Associate, Analyst, Systematic — Lu Yu originally joined Nicholas-Applegate
in 2002 as an intern in the Research and Risk Management department. After working for
Provident Advisors LLC as a risk analyst, Lu returned to Nicholas-Applegate as senior performance
analyst in the Performance Measurement group. Lu has also worked on analytics for the system-
atic team. Lu earned an M.S. degree from the University of Southern California, as well as from
the National University of Singapore, and her B.S. from Nanjing University, China. Lu earned her
CFA and CIPM designations and is a board member of the CFA Society of San Diego. She is
fluent in English and Chinese. Lu has five years of investment industry experience.
Sherry Zhang — Vice President, Analyst, Systematic — Sherry Zhang has research responsibili-
ties for the international and global systematic portfolios. Prior to joining Nicholas-Applegate, she
was at Pioneer Investments; JPMorgan Chase & Co.; Morgan Stanley Discover Financial Services;
and GE Capital Auto Financial Services. She earned her M.B.A. from The University of Chicago,
Graduate School of Business; her M.P.H. from the University of Michigan, School of Public Health;
and her B.S. from Salem College, majoring in biology. She is a CFA Level II candidate, and is pro-
ficient in English and Chinese. Sherry has six years of investment industry experience.
by Cathleen Bramlage

4. 4
Nicholas-Applegate’s systematic team is a
pioneer in the quantitative management of
emerging markets portfolios. The team is
applying the same philosophy and process it has
used for the International Systematic strategy
since 2001 and its Global Systematic strategy
since 2004. At the Margin met with the
Emerging Markets Systematic implementation
team, which includes Kunal Ghosh, Portfolio
Manager; Steven Tael, Portfolio Manager; and
Sherry Zhang, Analyst, to learn more about
quantitative emerging markets management
and their investment outlook.
Q: What is the investment philosophy and
process for Emerging Markets Systematic
portfolios?
Team: The Emerging Markets Systematic
strategy was developed as a natural extension
of our successful International and Global
Systematic strategies. We felt that the firm’s
philosophy of identifying stocks undergoing
sustainable positive change could be success-
fully applied to stocks in the rapidly growing
emerging markets equity universe.
Q: How does your experience managing
global and non-U.S. developed markets
portfolios help you manage an emerging
markets strategy?
Team: One advantage is that we have an
existing successful international platform that
we could extend to the emerging markets stock
universe. While there are significant similarities
between the International/Global Systematic
Equity Model and the Emerging Markets
Systematic Model, the models are not identical.
Stocks in developed markets require slightly dif-
ferent model attributes than stocks in emerging
markets. If the models are compared side by
side, there is significant similarity. For example,
when we are searching for positive change cat-
alysts, we utilize analyst forecasts. Emerging
markets can be far less efficient than developed
markets; some of our technical parameters are
modified to exploit this inefficiency.
The similarity between models does not end at
the stock-selection level. The International
Systematic, Global Systematic and Emerging
Markets Systematic strategies all use a common
model to measure stock-specific risk.
Lastly, as emerging market firms adopt devel-
oped market accounting standards (e.g., GAAP
and IAS), we have confidence that our qualita-
tive overlay efforts will be meaningful.
Q: How do you manage risk in the
emerging markets asset class?
Team: The Global/International Systematic
strategies and the Emerging Markets Systematic
strategy use similar risk controls. There are still
two components controlling risk. At the stock
level, the risk model provides an estimate of
idiosyncratic risk for each stock. At the
portfolio level, risk constraints ensure that the
portfolios do not differ too much from the
benchmark.
The one significant difference between these
strategies is that we put tighter bounds on the
country exposures for the Emerging Markets
Systematic strategy. Emerging market countries,
as the name implies, have more sovereign and
geopolitical risk than do developed markets.
For example, if an emerging market country
experiences a political event, all stocks in that
country are affected. These tighter bounds con-
trol political risk.
Because we believe that the emerging markets
asset class is inefficient, we relax the constraint
on the active position size. This is the reason
that the Emerging Markets Systematic strategy
runs at a slightly higher tracking error than our
Global / International Systematic strategies. We
Kunal Ghosh
Senior Vice President,
Portfolio Manager
Steven Tael, Ph.D.
Vice President,
Portfolio Manager
Sherry Zhang
Vice President,
Analyst
PORTFOLIO MANAGER INSIGHTS: EMERGING MARKETS SYSTEMATIC

5. believe this to be a prudent trade-
off between seeking outperfor-
mance and controlling for risk.
Q: What challenges have you
encountered?
Team: Quantitative managers are
typically late to the party when it
involves a new market space or
geographical region. This is
because quantitative managers
require mounds of data in
tabulated form which may not be
readily available. This is what keeps
most quantitative managers out of
the emerging markets space.
However, we realized that data are
available over the last seven to ten
years, but, because of the lack of scrutiny by investors, the
data are not very clean. Producing clean data was our biggest
challenge, but will be rewarding for our investors.
Q: Where are you finding opportunities in emerging
markets?
Team: We noticed the combined GDP of the twenty-five
emerging markets countries in the MSCI EM Index has been
ramping up and has become as large as the Eurozone
Average GDP. See Exhibit 1.
Brazil is experiencing a materials boom, which is reflected in
our portfolio. Brazil has increased domestic consumption and
a very favorable interest rate environment. It is one of the few
countries whose central bank is decreasing interest rates.
Every other central bank is increasing interest rates to reduce
the liquidity in the market.
China has been experiencing explosive growth for some time
now. This growth is not only driven by exports, but the
increasing wealth of Chinese citizens is driving growth
through increased domestic consumption.
We’re finding significant opportunities not only in BRIC
(Brazil, Russia, India and China), but in other countries.
National economies that are favorably exposed to these
larger markets will benefit, and our model reflects this. South
Korea has benefited from the explosive growth in China
through their shipbuilding and construction industries. China
imports raw materials and exports finished goods through
shipping. Shipping demand has grown tremendously in the
last few years. The backlog on South Korean shipbuilders has
grown up to four years. Construction companies, such as
Samsung Construction, are involved in building Chinese infra-
structure including refineries, toll roads, and office buildings.
Other economies enjoying growth include Taiwan and
Thailand. Taiwan is the location for a significant percentage of
semiconductor manufacturing. Thailand has a relatively
greater degree of political instability, experiencing a political
coup in September 2006. Stocks are trading at a large dis-
count relative to other emerging market countries even as the
Thai economy continues to expand.
Q: Is there steam left in Brazil and China?
Team: Yes, we are still very bullish on economic growth in
China and Brazil, as the underlying economies of these coun-
tries remain healthy. Our portfolio reflects this bullishness.
While emerging markets stocks have enjoyed large gains
during the past year, corrections can occur at any time,
driven by events not related to stock or economic
fundamentals.
5
Source: FactSet
As of 31-Dec-06
Percent of Global GDP
10
15
20
25
30
35
97 98 99 00 01 02 03 04 05 06
United States
Eurozone Average
Emerging Markets
Japan
%
Exhibit 1
continued on page 10

6. 6
FEATURE: AN INTERVIEW WITH DR. ARTHUR B. LAFFER,
LAFFER ASSOCIATES
FEDERAL RESERVE
To hedge against a credit crunch, on August
17, the Federal Reserve lowered its primary dis-
count window rate by 50 basis points to
5.75% from 6.25%. This is substantial and
with considerable likelihood will restore
orderly conditions in the credit and financial
markets and abate potential downside risks to
economic growth.
With Friday, August 17’s press release from the
Federal Reserve Board suggesting that it is
open for business at the discount window, a
sizeable portion of the usual stigma associated
with using the discount window will be dimin-
ished, and depository institutions will be more
inclined to make use of it.1
Not only can depos-
itory institutions now borrow at a lower rate
from the Fed, but they will also be more
inclined to actually do so.
This latest situation is a liquidity crunch, not a
credit crunch. Credit is available — it is just
more expensive than it used to be. Liquidity is
what has been difficult to find. The Federal
Reserve has aggressively restrained the rate of
growth of the monetary base for quite some
time. Money supply was exceeding demand for
money up until about nine months ago, and
then it flipped. When short-term interest rates
topped out, the rate of growth of M1 acceler-
ated. Demand exceeding supply has recently
been evidenced by declining excess monetary
base growth. As excess base growth declines,
so too have interest rates and short-term rates
specifically.
Beyond their recent actions, the Federal
Reserve has allowed the effective fed funds
rate to fall substantially below its 5.25% target
for the fed funds rate. The daily effective fed
funds rate moved in a band between 4.54%
and 4.81% for over a week, and the intraday
effective fed funds rate has at times even
approached zero. Given that the Fed usually is
able to keep the effective fed funds rate
within a two basis point band around the
target fed funds rate, the recent drop in the
effective fed funds rate is unlikely to be a
random event. Rather, the Fed is deliberately
keeping the effective fed funds rate low so as
to provide extra liquidity without having to
lower the target fed funds rate. This is smart
policy: the Fed is providing liquidity without
making the market unnecessarily nervous.
Dr. Arthur B. Laffer, member of President Reagan’s Economic
Policy Advisory Board, obtained his M.B.A. and Ph.D. from
Stanford University after receiving his B.A. from Yale University.
Among many other achievements, he was the Chief Economist at
the Office of Management and Budget with former Secretary of
State George Schultz and scripted much of the tax-cutting
movements of the 1980s. In addition to currently sitting on
the Nicholas-Applegate Institutional Funds board, Dr. Laffer
continues to bring an influential and positive voice to financial
markets across the world.
At the Margin is pleased to have the opportunity to feature Dr. Laffer’s current thinking on two
topics of high economic interest: the impact of the Fed’s decision to cut the discount rate and
attractive non-U.S. markets for investments.
1
Depository institutions: commercial banks, credit unions and thrift institutions.

7. 7
In sum, the Fed has both officially and more qui-
etly eased its stance on monetary policy during
the last three weeks. These policy changes
should serve to reduce the level of uncertainty
in the financial markets, especially the credit
markets, and prevent a credit crunch from hap-
pening. The Federal Reserve has a wealth of
information and perspective that everyone else
may not understand when it makes its deci-
sions. Knowing what I do, I believe that the fed-
eral funds target rate is 100 basis points higher
than it needs to be. I expect the Federal Reserve
to take all of this into account as they make
necessary adjustments sooner rather than later.
While markets seem to be “banking” on a rate
cut that may or may not happen on September
18, the Federal Reserve is poised to continue
responding to falling short-term interest rates
by cutting the federal funds target rate in the
near future.
ATTRACTIVE NON-U.S. MARKETS
We select countries for their pro-growth policies
that we believe will correspond to gains in their
respective markets. The Laffer Global
Competitiveness Model provides three criteria
for judging these countries: 1) the severity of
the current level of maximum tax rates; 2) the
legislated — or likely — tax changes on these
rates; and 3) the changes in the country’s real
exchange rate relative to the U.S. dollar. Our top
nine emerging markets according to this model,
in rank order, are: Mexico, Turkey, Russia, India,
Malaysia, Poland, Hungary, Brazil and the Czech
Republic.
More countries around the globe have moved
to a flat-tax system, and this supply-side initia-
tive is proving that it is here to stay. Seventeen
countries over the last thirty years have already
adopted flat-tax systems and tax competition
between these (mostly Eastern European) coun-
tries will cause others to follow. The most recent
convert is the Czech Republic, where Prime
Minister Mirek Topolánek has proposed
replacing the country’s progressive personal
income tax code with a 15% flat rate and drop-
ping the corporate tax rate from 24% to 19%.
Just as importantly, Russian lawmakers rejected
amendments to their tax code which would
have moved them from a flat tax back to a pro-
gressive tax. To supply-siders, the benefits of a
move to a flat-tax system are clear: a flat tax is
a catalyst for growth, as lower tax rates have a
positive effect on work, output, and employ-
ment. In addition, by taxing a broader base,
taxpayers have fewer incentives to avoid paying
their fair share of taxes.
One developed market country which has
moved up in our favor is France, as the election
of Nicolas Sarkozy reflects a movement for
much-needed change. In recent years, the
country has lingered in the bottom of our
country rankings with Japan and Germany
because of anti-growth tax policy. Sarkozy was
elected on the basis of pro-growth tax cuts that
will fuel economic growth and generate
corresponding business returns. Look to France,
the Czech Republic and other countries
enacting (or maintaining) positive supply-side
initiatives in the near future for possible
investment choices.
by Allison Laffer
Credit is available –
it is just more
expensive than it
used to be.
Liquidity is what
has been difficult
to find.

8. 8
FOCUS: MEXICO — SIX MONTHS SOUTH OF THE BORDER
Mixing beer with ice, lime
juice and equal dashes of
Worcestershire sauce and
Maggi sauce sounds like a
recipe for heartburn. To be
honest, it is. But if you are ever
in the vicinity of Morelia,
Mexico, you may find yourself
trying the spicy, dark concoc-
tion the locals call ‘michelada’.
The flavor isn’t actually too
bad.
Morelia is the capital of the state of Michoacán.
It is a large city of about 900,000 people
located midway between Guadalajara and
Mexico City, at around 6,500 feet above sea
level. Despite Morelia’s national importance, its
nearby trout-filled lakes and pine-covered
mountains, and the fact the city’s entire down-
town is a United Nations World Heritage Site,
Morelia isn’t well known among Americans.
Working there for six months was a real treat.
I’ve lived in Mexico before. In the spring of
1997, I escaped undergraduate business classes
for a semester and studied at a language insti-
tute in the southern state of Oaxaca. Back then,
the country was still reeling from the 1994 peso
devaluation. One-month interbank interest
rates were over 20% and consumer prices were
rising 20-30% every twelve months. See Exhibit
2. The centrist Institutional Revolutionary Party
(PRI) had dominated national politics for sixty-
eight consecutive years. Today, inflation is 4%,
the Bank of Mexico funding rate is 7.25% and
the country is under the stewardship of the
conservative National Action Party (PAN). In the
event of another currency shock, Mexico has a
$71 billion stockpile of foreign reserves with
Greg Meier has worked as a financial writer on Nicholas-Applegate’s marketing team since August
2005. Each month, he articulates the firm’s viewpoints on capital market and economic events in the
Market Overview and Equity Update sections of At the Margin. He recently spent six months
working from Morelia, Mexico and shares his first-hand impressions of the rapidly growing local
economy in this article.
Exhibit 2
Select Economic and Market Indicators Then Date Now Date
‘Bolsa’ IPC General Stock Index 3,306 Dec-96 29,486 Aug-07
Dow Jones Industrial Average 6,436 Dec-96 13,240 Aug-07
International Reserves (billions USD) $17,509 Dec-96 $71,060 Aug-07
Crude Oil ($/barrel USD) $25.02 Dec-96 $72.33 Aug-07
CPI Inflation (% 12M) 27.70% Dec-96 4.14% Jul-07
Bank of Mexico Funding Rate 30.50% Nov-98 7.25% Aug-07
Workers’ Remittances (millions USD) $4,865 1997 $23,054 2006
Credit Cards in Circulation (millions) 6.39 1Q02 18.09 2Q07
Time Required to Start a Business 58 days 2005 27 days 2006
Spot Exchange Rate MXN/USD 7.87 Dec-96 11.04 Aug-07
As of 31-Aug-07
Sources: Bank of Mexico; World Bank; FactSet

9. 9
which to defend itself. This summer, the country’s main stock
index rallied to a record high and the premium asked on gov-
ernment debt tumbled to a record low. “Que pasa?” you
might ask.
THE REBIRTH OF CONSUMERISM
For one, Mexico’s growing middle class has a penchant for
spending. Sipping coffee at the swank Hotel Virrey on
Avenida Madero in downtown Morelia in July, I watched
soccer moms on cell phones driving SUVs zip by about as fre-
quently as the mopeds stacked with three, four, and some-
times five passengers. In addition to a multitude of local
retailers, Morelia is home to big brand names like Wal-Mart,
Costco, Home Depot, Starbucks, even Hummer. Similar to
American teenagers, Morelia’s awkward youth hang at the
mall on Friday nights. Some wear Abercrombie and Fitch and
Tommy Hilfiger. Others sport black eyeliner, mohawks and
nose rings. All want to see and be seen. And they will get
their wish. Soon they will have at their disposal the massive
500 hectare regional shopping and entertainment center
being built in the foothills overlooking Morelia. According to
the developer’s Web site (http://gicsa.com.mx), the ‘Paseo
Morelia’ will have golf courses, a horse riding club, hotels and
“the most prestigious department stores.” Construction is
underway. Completion is slated for next fall.
Mexico’s newfound affluence is, in part, funded with bor-
rowed money. That’s a break from the past because, follow-
ing the 1994 peso devaluation, banks effectively shuttered
their doors to consumer lending. More recently, with unem-
ployment under 4% (underemployment is substantially
higher), GDP growth averaging over 3% and a bit of federal
encouragement, those shutters are coming down.
A BANKING REVOLUTION
World Bank and Bank of Mexico figures show credit cards in
circulation in Mexico nearly tripled between 1Q02 and 2Q07,
while mortgage originations rose 24.5% in July (year-over-
year). The Economist Intelligence Unit sees Mexican credit
growth accelerating 30% annually. To meet demand for
loans, the country’s biggest locally owned and publicly traded
bank, Financiero Banorte, has plans to build 65 new
branches by year-end and add approximately 2,000 new
employees by the end of 2008. Banorte is the sole financial
company tracked in the MSCI Mexico Index, and the reason
Mexico’s financial sector was the country’s best-performing
sector over the past two years, after telecommunication
services.
That success isn’t easy to keep secret, particularly with an
800-pound gorilla like Wal-Mart de Mexico sniffing about the
region. By the end of 2008, Wal-Mart de Mexico expects to
open 85 new financial centers in its stores. Customers
earning as little as $2,200/year will be eligible for charge
cards. If lending standards loosen, consumer past-due debt
will likely rise. That may impact industry profit margins, which
have historically been high due to lack of federal oversight
and the 32% average annual interest rate on Mexican plastic.
Yet it is unclear whether Banorte should worry, because there
is such a huge opportunity for growth. By some estimates,
only one-third of Mexicans have bank accounts, and for every
100,000 residents there are just eight bank branches.
BUILDING A BETTER MAÑANA
If Mexico’s consumer credit market is a glass of michelada,
the country’s infrastructure industry is a five-gallon bucket of
micheladas, as measured by current valuations. The trailing
twelve-month price-earnings ratio of Banorte of 14.6 on
August 31, compares with an average 38.1 P/E for Mexico’s
construction and engineering industry. While the World
Economic Forum places China, India and El Salvador in front
of Mexico in terms of infrastructure competitiveness, that is
set to change. On July 18, President Felipe Calderón laid out
an ambitious five-year $37 billion public-private development
proposal. His plan includes:
Building three new commercial airports to service the
country’s beach resorts
Upgrading more than thirty current airports and several
seaports and rail lines
Constructing or improving nearly 11,000 miles of high-
ways, the most in more than twelve years
Merrill Lynch estimates a $7 billion chunk of the plan could
be awarded in the next few months. If fully implemented, the
spending plan will boost job growth, cut transportation costs
and perhaps even appease the more restive rural corners of
the country.
continued on page 10

10. 10
Habitat for Humanity
Charitable Event — In June,
twenty employees joined forces
with Habitat to construct housing
for a family in the San Diego
suburb of Escondido.
Focus: Mexico — Six Months South of the Border
continued from page 9:
Portfolio Manager Insights: Emerging Markets
Systematic
continued from page 5:
Many of the macroeconomic factors present in Mexico are
common to other emerging markets. China plans an
estimated $67 billion in infrastructure improvements ahead of
the 2008 Beijing Olympic Games. In Brazil, lending rates are
at a record low 11.5% due to seventeen central bank rate
cuts during the past two years. ABN Amro estimates each
0.5% drop in lending rates draws three million Brazilians into
the country’s mortgage lending market. But there are
differences.
Exposure to America’s housing-led downturn is higher in
Mexico than most countries. Eighty percent of Mexican
exports end up in the U.S. and remittances from abroad
equate to 2.5% of Mexico’s GDP. In part due to construction
job losses and tighter border security, remittances fell during
the first part of 2007, the first decline in more than ten years.
If the U.S. housing market continues its downward spiral,
it will impact our neighbors to the south. Hopefully it won’t
be so serious as to require the five-gallon buckets of
micheladas.
by Greg Meier
Q: Are you finding companies with good underlying
fundamentals?
Team: Our model is revealing opportunities in a variety of
areas, such as Taiwanese semiconductor firms, Korean con-
struction firms, Chinese refineries and South African banks.
South African banks are benefiting because the South African
banking system is on a par with the developed world and is
active throughout Africa. This is typical: as these societies
become wealthier, they start to demand different kinds of
goods and services reflecting the greater wealth of their
societies.
Thank you for your time. Good luck with the new
strategy.
by Thomas Charlebois

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advisor with the Securities and Exchange Commission. The Firm is defined as all
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Under no circumstances does the information contained within represent a
recommendation to buy or sell securities.
Investments in overseas markets pose special risks, including currency
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Small-cap stocks may be subject to a higher degree of risk than more estab-
lished companies’ securities. The illiquidity of the small-cap market may adversely
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Unless otherwise noted, equity index returns reflect the reinvestment of all
income dividends and capital gains, if any, and bond index returns include all
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direct investments into any index.
Securities, sectors, countries and representative buys and sells herein illustrate
companies, sectors and countries in which portfolios may invest. Portfolio holdings
are subject to change daily. Unless otherwise noted, Nicholas-Applegate is the
source of all performance data, characteristics, charts and illustrations. Past
performance is not an indication of future performance.
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reflect composite performance. For a list of all representative buys and sells for a
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11
DISCLOSURE:

12. 12
Source: Bloomberg
As of 31-Aug-07
*Intraday high reference is 01-Sep-00 not 24-Mar-00.
The Fed to the Rescue...
33
21 18 12
72 72
125
33
0
40
80
120
Intraday high to low % decline
in the S&P 500 Index
Calendar days until Fed action
from intraday high
1987 Stock
Market Crash
Russia/LTCM
Crisis
Technology
Bubble*
Subprime/Credit
Crisis
Current Probabilities for Fed Announcement Date
18-Sep-07
34.4
31.0
19.7
14.9
0
10
20
30
40
Decrease to
4.50
Decrease to
5.00
No Change
5.25
Decrease to
4.75
%
Source: Bloomberg
As of 30-Aug-07
Prior to July’s market sell-off, there was
a greater than 90 percent chance the
Federal Reserve would hold the fed
funds target rate steady at 5.25% at the
September 18 Federal Open Market
Committee meeting. Rate cuts of 50 and
75 basis points were highly unlikely. Fast
forward to the end of August, and
probabilities have changed dramatically.
As of August 30, there was a 34 percent
chance of a 75 basis point cut and a 31
percent chance of a 25 basis point cut at
the September meeting.
Source: Wall Street Journal; Bloomberg; U.S. Census Bureau
As of 31-Aug-07
Construction Spending: Commercial Pickup
vs. Residential Drop-off
0
100
200
300
400
500
600
700
93 95 97 99 01 03 05 07
Residential Construction
Non-residential Construction
BillionsofDollars($)
A slump in residential construction
trimmed 0.6% from the 4.0% rise in
2Q07 GDP. Fortunately, building in the
commercial sector more than made up
for the shortfall. Non-residential con-
struction surged 28% between April
and June, the biggest gain in more
than a quarter century, and a 1.1%
contribution to overall growth. This
pillar of strength may start to crack
during the second half of 2007 if the
lock-up in the commercial paper
market forces companies to cut back
on business investment.
CHARTBOOK — RESEARCH FROM THE FIELD
The chart compares percentage declines
from the intraday high to the low for
the S&P 500 Index during times of
market crisis versus the calendar days it
takes for the Fed to respond to the
decline. It appears the Fed is acting
sooner on relatively smaller price
declines in the index.
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