Emerging markets guru takes the plunge again

There’s nothing quite like a baptism by fire. As if Donald Trump’s intensifying trade wars and rising US interest rates were not enough to unsettle emerging markets, Turkey’s economic and currency problems have exploded.

But undaunted, the emerging markets fund veteran Mark Mobius is launching a new emerging markets trust. Yes, another one.

What was once a barely trodden path to the remote hinterlands of the investment globe already looks crowded with long trains of jingling fund manager caravans in search of the new Golconda.

It’s not just the eleven global investment trusts already competing in the Investment Association list, but the dozens of unit trust funds and mainstream international funds that have a section of their portfolios dedicated to the emerging markets universe.

Now some exposure to emerging markets is recommended for private investors. They provide a toe-hold in some of the world’s fastest growing economies. They provide diversification, spreading invest- ment risk across different segments. But they are also volatile, politically risky, susceptible to currency plunges, economic downturns in developed country economies and with dangers that can attend less well regulated markets. The most prudent way into an EM fund or trust is through regular monthly investment to smooth the timing risk.

Over the past two years emerging markets have not performed well with the onset of quantitative tightening in the US, rising interest rates and escalating trade tariff wars where emerging markets are particularly vulnerable. Not only are these economies vulnerable to first world downturns but investors in uncertain periods tend to reduce risk by retreating into household name defensives and selling down higher risk and more volatile emerging market holdings.

Yet just when investors are looking nervy, Mark Mobius is taking the plunge.

Trading on his well-kent name, the Mobius Investment Trust (MMIT) will focus on small and medium-sized companies in emerging and frontier markets and will be run with an absolute return remit. This would be the first closed-end fund from Mobius’ new firm which he formed with two colleagues after the trio quit fund manager Franklin Templeton earlier this year.

Says Mobius, “the recent correction across emerging and frontier markets has presented the perfect conditions to be launching MMIT, with currencies at an all-time low and company valuations looking increasingly attractive.” Stockbroker Jefferies International has been hired to co-ordinate the fund-raising and a London listing is scheduled for next month.

Full marks for fortitude, because the 20 per cent plunge in the Turkish currency last week has sent a further wave of investors scurrying to the hills, with confidence in developing country markets taking another knock.

A large chunk of the country’s deficit is owed in foreign currency and due for refinancing soon, while inflation has hit 15 per cent. The crisis follows an unsuccessful mission to the US and a statement from the Trump administration that it was reviewing Turkey’s duty-free access to the US market.

Now it might seem that a crisis in Turkey is of little consequence to the global stock market. It accounts for less than one per cent of the emerging markets index. But it represents more than 11 per cent of the narrower emerging Europe stock market region where the country looms large, accounting for 11.2 per cent of the index.

And some funds have chunky exposure. The tiny £18 million Aberdeen Eastern Europe Equity fund held 16 per cent of its assets in Turkey at the end of June. The JPM Emerging Europe Equity fund holds 14 per cent of its assets in the country while the Jupiter Emerging European Opportunities fund has 13.5 per cent exposure.

Now for contrarian investors, all this adds lustre to the argument for a plunge into emerging markets - and particularly smaller companies in these areas. This is just the time when investors should be going against the herd and picking up bargains.

Meanwhile how have other emerging market trusts been faring? Best performer in the global EM investment trust sector is JP Morgan Emerging Markets Trust with a gain of 66.6 per cent over five years. The shares at 887p stand on a discount to net assets of 13.5 per cent . It is closely followed by Blackrock Frontiers Investment Trust, up 64.8 per cent over five years with the shares at 154.5p yielding 3.2 per cent and standing at a premium of 3.2 per cent. Templeton, the Daddy of them all, is up 40.6 per cent and is on a discount of 14.3 per cent.

Bottom performer out of the 11 is the diminutive £45 million Aberdeen Frontier Markets Trust, up 7.3 per cent over five years but down 17.4 per cent over the past 12 months. The shares at 54.25p yield 4.18 per cent but are on a discount of 13.2 per cent.

Definitely one for the brave, but unfortunately there is no regular monthly savings plan option that would help investors spread their timing risk.