July-August 2010

FUND LAUNCHES: divine interventions

Jesus_rioThe Americas is attractive to asset managers, but North and South are divided by more than the Rio Grande Nick Fitzpatrick reviews a selection of fund launches.
It was Porfirio Díaz, a former Mexican president, who said: “Poor Mexico, so far from God, so close to the United States”. Back then, circa 1900, Mexico was indeed poor, but the commodity boom and stricter government economic policies in Mexico and the rest of Latin America are making the region much more prosperous today.

Recent fund launches continue to reflect interest in those countries south of the Rio Grande, led by Brazil. Aberdeen Asset Management expected to launch a closed-ended, London-listed Latin American income fund in July to benefit from growth.

But at the same time, other managers have looked northwards to the US in the expectation of benefiting less from growth and more from recovery – witness Threadneedle and with it the US alpha fund.

Meanwhile, a recent Henderson Global Investors fund launch is more agnostic about geographies, but as a global currency fund, it could benefit from the drive towards investment in emerging market equities and local currency bonds, such as Latin America’s.

Either way, choosing to be far from God or close to the US is a key geographical consideration for many investors these days.

Hopefully for Aberdeen, being so far from the deity will not inhibit the chances of success for its Aberdeen Latin American Income Fund, the first UK-listed Latin American closed-end fund with an income bias. Initially the portfolio blend will be approximately 60% invested in listed equities with the balance invested in sovereign bonds. The equities will be focused on growth-orientated stocks, with the bonds expected to provide much of the income.

The blended portfolio approach will allow the asset allocation to be modified in response to changing economic circumstances, says Aberdeen.

The firm, like many other fund managers this year with funds targeting Latin America, and particularly Brazil, is bullish about the region’s economic outlook.
Emerging prosperity
Fund managers Devan Kaloo and Brett Diment, head of emerging market equities and debt respectively at Aberdeen, say that the resource-rich nations of Latin America are far more than a mere commodity play, which has characterised them in the past. Demand for commodities has led to trade surpluses, but of more interest to managers like Aberdeen is the rise of domestic consumption. Growing, young populations with burgeoning workforces are enhancing earning and spending power, and Aberdeen says local retailers, banks and drinks companies are of particular appeal.

The initial target for the annual dividend yield from the fund is 4.25% with the aim of growing it over time. Dividends will be paid quarterly. The fund will be domiciled in Jersey, listed on the UK Listing Authority’s Official List and traded on the London Stock Exchange’s main market for listed securities.

The rationale for launches in the US equities space recently might be that because the US was the first into recession, it could be the first developed market to recover. Threadneedle’s chief investment officer Sarah Arkle, though, is “relatively cautious” about the strength of recoveries, particularly in the developed world.

However, in her July investment report, she notes: “The US is enjoying the strongest growth of the major economies and we expect the momentum of Q1, boosted by the inventory cycle, to remain healthy in Q2. Recent falls in the mortgage rate and oil price will be helpful.”

The firm recently launched the Threadneedle (Lux) American Absolute Alpha Fund, the first US equities fund in Threadneedle’s absolute return product range. A Ucits III fund, it can take long positions in US equities and will take short (and possibly long) positions in derivatives, such as futures and equity swaps. The portfolio will primarily take long and short positions in North American equities and will generate the majority of performance from stock selection.

Campbell Fleming, head of distribution at Threadneedle, says: “We have spoken extensively to our clients and they have indicated a great appetite for a product that will open up the US investment world in this form.”

Meetings held by Threadneedle with companies in cyclical US industries such as railroads, trucking, plant hire and industrial manufacturing, have been encouraging, the firm says, despite some softer economic indicators for housing, retail sales and employment. However, Threadneedle anticipates a slower second half for growth as the effect of the fiscal package and stock cycle weaken.

The fund is a Sicav and is managed by Stephen Moore, who leads the American Crescendo Fund, a North American equity long/short fund, and was actively involved in the development of the American Extended Alpha Fund, Threadneedle’s first Ucits III 130/30 fund.

The fund is for investors who want capital appreciation, but who also have a high risk tolerance and a long-term perspective.

The ability of the fund to take short positions is potentially useful as the US economic outlook remains lumpy. For example, AllianceBernstein’s Joseph G Carson, US economist and director of global economic research, recently said he does not expect a double-dip US recession and that growth is sustainable. However, the  outlook for US and global recovery is clouded by a “litany of fundamental and policy issues”.

Daniel Sheard, fund manager of the Julius Baer Absolute Return Bond Fund, says the debt burden of developed economies has led to highly volatile markets and this will remain an important theme for several years to come.

But against this backdrop, as well as certain equities, Sheard also expects a range of currencies to do well, including in emerging markets such as the Brazilian real and the Korean won, but also including currencies from commodity-rich countries, such as Scandinavia and Australia. He is underweight the euro.

Opportunities in currencies, particularly emerging market currencies, have been flagged by a number of fund managers lately, and one of the latest to roll out a fund in this asset class is Henderson Global Investors.

Henderson recently launched the Henderson Horizon Global Currency Fund, a Luxembourg Sicav managed by Bob Arends and designed to give institutional, wholesale and retail investors access to Henderson’s quantitative investment approach in developed and emerging market currencies.

Arends, head of currency, and his five-strong currency team joined Henderson last year from Fortis and launched the Cayman-domiciled hedge fund, the Henderson Global Currency Fund, in May 2009. The Henderson Horizon Global Currency Fund is a sophisticated Ucits III version of the strategy.

Arends says currency should be part of a well diversified portfolio as it has a low correlation with other asset classes.

©2010 funds europe

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