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The current rash of emerging market trust launches should sound warning bells
by Charlie Parker on Aug 23, 2010 at 13:25
The chartists are telling us that equity markets are heading for trouble with double death crosses forming in the moving averages, and Hindenburg Omens overshadowing the New York Stock Exchange. If you doubt this, visit our website.
For all this dramatic talk, though, investors are continuing to plough money into newly launched emerging market investment trusts as if it were the happiest of times.
Last week, Aberdeen’s new Latin American trust raised a pretty impressive £52 million. Since March, JP Morgan Asset Management has raised £104 million for an Emerging Markets Income fund and £50 million for a Brazil investment trust.
Clearly, products can only be sold when there is a market to buy them. We can hardly blame fund management houses for the timing of the launches. However, that does not stop us drawing lessons from the historical pattern of investment trust launches. In general, a flood of money flowing into an investment trust asset class is seen as a pretty good contra-indicator.
In other words, fundraisings generally come before a fall. As evidence of this, investors will of course first turn to split capital trusts – though this is perhaps somewhat misleading because splits had some very specific problems.
Further evidence, though, can be found in the flood of fund of hedge funds launched in a closed-ended structure in 2005 and 2006. This was a period when everyone loved hedge funds and so appeared to be psychologically able ignore the obvious problem that the trust’s shares would become the only exit out of the sector if trouble began.
Perhaps a more potent example, though, would be the last wave of money that flooded into emerging market investment trusts in the early to mid-1990s. The launches were followed by a significant emerging-market bear market epitomised, as many will recall, by the 1998 Asian crisis.
One of the most iconic failed launches of that period was Indonesian trust Edinburgh Java. As that trust was in its dying days in 2001, Citywire wrote: ‘Edinburgh Java was launched in 1990 to provide long-term capital growth through investment in Indonesia, but the Indonesian stock market was not forthcoming. The trust appears to be in its death-throes but, for the record, its share price is up 0.5p today.’
Oh dear. It did die, losing 86% of its value in five years. Indeed, that period in the early 1990s was formative in shaping the investment trust sector of the next decade. It was back then that the sector’s most famous arbitrageur, Laxey Partners, was launched. It started as an emerging market specialist for a reason. Namely, there were lots of emerging market investment trusts to shut down.
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