Emerging Value Capital Management, LLC 152 West 57th Street

Floor 46
New York, NY, 10019
Tel1: 312-363-8599
Tel2: 212-277-5607
July 2009 letter to investors Fax: 212-974-1850

Dear Partners and Shareholders,

Following is our tenth monthly letter to investors. As always, I am happy to speak with partners
(and potential new partners) so please do not hesitate to call me with any questions, thoughts or
comments.

Fund Performance:
During July 2009, EVCM Fund returned an estimated +5.3% (net to investors). During this same
time period, the S&P500 (SPY) returned approximately +7.5%, and the MSCI All Country World
Index (ACWI) returned approximately +9.4%.

Since inception (10/15/2008), EVCM Fund returned an estimated +27.8% (net to investors).
During this same time period, the S&P500 (SPY) declined approximately -1.0%, and the MSCI All
Country World Index (ACWI) returned approximately +6.5%.

The stock market rally continued in full force in July. EVCM fund had a nice return, but lagged the
markets due to our defensive positioning. We remain very defensively positioned with lots of
cash and bonds, high quality stocks, a few shorts and hedges, and disciplined position sizes.
When stock markets decline again (and sooner or later they will) our risk aversion should help
protect our capital.

As before, I caution investors not to focus on monthly returns (monthly results are mostly random
and should not be extrapolated). Rather, I hope you will evaluate my performance over a multi-
year period.

July 2009 2009 YTD Since Inception

(10/15/2008)
EVCM – Net to Investors +5.3% +22.3% +27.8%
S&P500 (SPY) +7.5% +9.5% -1.0%
MSCI All Country World Index (ACWI) +9.4% +16.4% +6.5%
*Please note that individual investor net returns will vary due to the timing of one's investment. The results reported above
are unaudited estimates and may be subject to change.

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 Value of $1000 invested at inception:
EVCM Fund SPY ACWI

$1,400

$1,300

$1,200

$1,100

$1,000

$900

$800

$700
09

09

09

09

09

09

09
08

08

08

08
/20

/20

/20

/20

0
1/ 2

8/ 2

1/ 2

0/ 2

1/ 2

0/ 2

1/ 2
/ 14

/ 31

/ 30

/ 31

1/3

2/2

3/3

4/3

5/3

6/3

7/3
10

10

11

12

Stock market rally continues:

The stock market rally continued in full force in July. For both the economy and for individual
companies, anything less than a terrible news report was viewed as a bullish sign. Many
corporations reported something along the lines of: “the rate of decline is slowing”. Dusting off
my old college calculus book, I figured out this statement seems to mean that the second
derivative of sales with respect to time is positive. But why stop at the second derivative? I
suspect it is only a matter of time before we go to the third derivative of sales and some company
reports the “great news” that: “the rate of the rate of decline is slowing”. ☺

Like with most other rallies, there is a “story” being told to justify the bullishness. The current
story is that the crisis of 2008 has caused corporations to dramatically reduce their expenses and
employee counts so that they are now ultra lean and efficient and will post great results once the
economy recovers. While this story may have a kernel of truth to it, it makes me wonder how
inefficiently these corporations must have been running prior to 2008. Reducing unnecessary
costs and increasing operational efficiency is part of the ongoing job of every manager. It should
not be undertaken only in response to a crisis.

As far as I can tell both the macroeconomic and company specific data remain weak. At best we
can say that the economy and corporate results are, on average, less weak than we expected.
Stock prices ultimately follow corporate earnings and it is difficult to see corporate earnings
increasing significantly given the strong macro economic head winds we still face. While I am
continuing to see some attractive investment opportunities, our overall portfolio positioning
remains defensive and conservative. I am unwilling to risk our capital by chasing this market
rally.

Just a few months ago it seemed like there was no limit to how low stocks could go. Every day
was a new opportunity to sell and no “buy” decision went unpunished. It was difficult to imagine
what would break the cycle and cause stocks to rise again. A few months have passed and all is

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forgotten. Every day is a new opportunity to buy and stocks just keep going higher. This positive
sentiment can and will turn on a dime. I don’t know when or what the catalyst will be, but I know
that stocks are now pricing in a fairly rosy recovery and could decline significantly if investor
sentiment shifts from greed back to fear again.

Analysis of results to date:

EVCM Fund has completed 10 months of operation. While this is far too short a time frame from
which to draw any firm conclusions, I believe that a brief analysis of our results to date is
warranted.

Since EVCM funds inception, we have outperformed our benchmarks by a wide margin. Looking
at the chart above and the table below, you will notice that most of our outperformance has come
in months where the markets declined (Oct 2008, Nov 2008, Jan 2009). We usually lagged
behind the markets on strong up months (Mar 2009, Apr 2009, and July 2009). This is exactly
how it should be. Our investment process is focused first and foremost on capital protection and
risk management. We invest conservatively and constantly worry about how not to lose money.

In the future, you should expect this pattern to continue. We are likely to lag the market in up
months (hopefully by only a small margin) and we will attempt to avoid large declines in down
months. The end result over a long term market cycle should (we hope) lead to significant
outperformance verses our benchmarks.

Investment Analysis: Morgan Stanley Emerging Markets Domestic Debt Fund:

The Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) is a “global macro”
investment that EVCM fund holds. EDD is a closed end investment fund that mostly holds
government bonds of emerging market countries. The fund currently trades at a 16% discount to
the net value of its assets (NAV), has little leverage (about 20% - 25% leverage) has a dividend
yield of 7.5% and an internal yield to maturity of over 10%. It is a low-risk way to diversify out of
the US dollar while earning a nice yield.

EDD currently has an overweight in Mexico, Brazil, Turkey, and Indonesia government bonds.
Default risk for these bonds is low since governments rarely default on local currency bonds (they
can always print more local currency). The average duration for the portfolio is 4.25 years and the
portfolio is positioned to be more or less interest rate neutral. The government bonds that EDD
holds are mostly very liquid, with small bid/ask spreads, so calculated NAV for EDD is a reliable
number.

Clearly, owning EDD is a big bet against the US dollar and the Euro. As I have discussed before
the financial situation of the US (and also Europe) is not good with government debt reaching
records levels not seen since World War II. The US dollar rallied in 2008 and early 2009 as
investors perceived it to be a safe haven. But with financial markets slowly returning to normal,
the long term economic problems of the US and Europe will likely continue to pressure down the
value of their currencies.

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EDD’s assets yield over 10% (yield to maturity). It holds about $1.25B worth of government
bonds. I estimate that annual operating costs + interest costs = $25M. So annual yield is about:
$1.25B X 10% - $25M = $100M. Dividing $100M by 73M EDD shares outstanding gives us an
internal yield of about $1.37 per EDD share.

The Current share price is $13.25 so EDD’s internal annual yield is over 10%.
Some of this yield is being kept by the fund to grow its NAV, so the funds dividend yield is only
7.5%.

The 16% discount to NAV that EDD trades at is a bonus. It magnifies our yield and also provides
downside protection. I do not know if or when this discount will close, but in general, bond funds
(unlike stock funds) should trade at narrow discounts to NAV.

I think that owning this fund is a good alternative to holding non US Dollar cash. Instead of
holding a basket of foreign currencies and getting almost zero income, we can hold these
intermediate term fixed rate government bonds. The 16% discount to NAV and the fairly high
yield make this a better holding than a basket of cash.

Conclusions:
EVCM Fund remains conservatively positioned with capital preservation being our top priority.
We continue to search for and find mispriced investment opportunities that offer a compelling risk
reward balance.

At EVCM, we always remember that many of you (including myself) have a large part of your life
savings invested in the fund. We strive to treat our partners and shareholders the way we would
like to be treated were our positions reversed.

Please feel free to share this letter with prospective new partners and with other interested
investors. Also, thank you for the referrals!

Sincerely Yours,
Ori Eyal
Portfolio Manager

Disclosure:
This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or
investment product. Any such offer or solicitation may only be made by means of delivery of an approved
confidential offering memorandum. Past results are no guarantee of future results and no representation is
made that an investor will or is likely to achieve results similar to those shown. All investments involve risk
including the loss of principal.

An investment in the Fund may be deemed speculative and is not intended as a complete investment
program. It is designed only for sophisticated persons who are able to bear the risk of the substantial
impairment or loss of their investment in the Fund. The Fund is designed for investors who do not require
regular current income and who can accept a certain degree of risk in their investments. Prospective
investors should carefully consider the risk factors specified in the Offering Memorandum before making a
decision to invest in the Fund.

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