Underperforming emerging market investment trusts are to be the target of the Value Catalyst fund to...
Underperforming emerging market investment trusts are to be the target of the Value Catalyst fund to be launched next month.
The Dublin-based closed-end vehicle is being launched to target undervalued closed-end funds, especially in the emerging markets sector.
Once invested, the fund's managers, Andrew Pegge and Colin Kingsnorth, will take an extremely active stance to maximise shareholder value.
Options that may be taken include forcing a change in management, forcing a share buy-back, taking over the closed-end fund or winding it up and redistributing the capital.
Pegge and Kingsnorth originally worked together as fund of fund managers at Buchannan Partners before setting up Kingpin in 1995 as a joint venture with Regent Pacific. Kingpin was then involved in an attack on the $600m GT Chile Growth fund.
Excluding the technology sectors, there are 531 closed-end funds with an average discount of 19% representing a shortfall of nearly $24bn between their market capitalisation and their actual net assets, according to Pegge.
He put the blame for the wide discounts on the management of the 531 funds. Pegge added that managers charge inappropriate fees with few performance incentives.
In addition, boards are insufficiently independent and there is a lack of attention to shareholder value.
With regards to emerging market trusts, Pegge believes they have suffered from the recent appetite for the technology, media and telecom sector.
He said: "At the same time that money was flowing into this new sector, discounts on closed-end funds, particularly in the US, widened. A similar effect can be seen in UK investment trusts and offshore funds."
Value Catalyst will have a market cap of $100m, with each share costing $100.
There is an initial charge of 5%. At any one time, the portfolio will have around four to five holdings.
Pegge and Kingsnorth's approach will be similar to US arbitrageur groups, such as Millennium, rather than the less aggressive approach taken by managers of the Advance Developing Markets, according to Pegge.
"We want to see performance of trusts improve and for the sector to look more attractive. We also want boards to safeguard shareholder interests," he said.
Nigel Wilson, manager of Advance Developing Markets, welcomed the entrance of Pegge and Kingsnorth into the market. He said that, particularly in the emerging markets sector, there are too many small illiquid trusts and some kind of rationalisation is required.
More than half the trusts in the Standard & Poor's emerging markets sector have a market cap below £50m.
Wilson added: "Institutions want to leave the market because of poor performance and there are not enough buyers."
He pointed out even the larger trusts in the sector are struggling. The £547m Templeton Emerging Markets trust, for example, is trading at a discount to NAV of 26.8%.
Only a few years ago the trust's shares were trading close to NAV or at a premium. Over the three years to 17 May the trust's share price has fallen by 22.4%.
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