Vol.38 - Exotic Funds
Exotic Funds
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By Chris Cleary, Banner Japan K.K | January 19, 2006 | Comment on this article
If you had invested in a particular Asia ex-Japan mutual fund early in 1971, you would now have a profit of 14,600%.
Of course there are some assumptions going on here, and not just those of hindsight – that you knew about the fund way back then; that you were not only alive but old enough to invest; that you believed in the economic prospects of a region with a reputation for not much more than making textiles and cheap plastic toys, and was largely perceived as Third World; that you were prepared to put your money into the region while the Vietnam War intensified and the domino theory was taken seriously; and that you held the fund whatever the drawdowns, as you would have had losses of 50% or worse into January 1975, in the aftermath of the Asian Crisis, and at the end of the US stock debacle 2000~2003.
Nevertheless, the thought of a 14,600% profit is quite attractive, and begs the question: do such opportunities belong only in the past / are there equivalent opportunities open another generation along?
The possibility of such profits will only come with the kind of risks and the kind of volatility indicated. Mature markets don’t deliver returns of that magnitude. The NASDAQ in its immature days did, and then got manic, but is now a bust flush; the gain of 110% since the October 2002 low is paltry beside the preceding 82.6% loss, and no doubt the October 2002 lows will be taken out in the medium term future. We will probably have to wait another half generation until the correction has fully run its course, and with no expectation that the following bull market will be even half as powerful. Of the other mature economies, we can expect sustained gains from Japan, but not yet I think: the current rise is a little too euphoric to warrant credence, and we have to see how the economy and its institutions negotiate the rise of interest rates and the dislocations of imploding bond prices, as well as an overhaul of taxation.
As for the ‘emerging’ world, Asia is a well-known story now, and Eastern Europe is ten years into its capitalist adventure – a lot of the returns are in, but surely there will be a lot more to come. Latin America is a story of boom and bust – a story of market timing – as has hitherto been India, where the wealth divide between the cities and the countryside and poor infrastucture development limit the possibilities. China is a conundrum with its powerful year-on-year growth, its opaque financial reporting and questionable banking system, its wealth, regional and gender imbalances – and the unresolved tensions between a capitalist economy and political dictatorship. China will become a dominant economic player, but there will be domestic shocks along the way, and the foreign investor will not find it easy to make money – there is sense in the idea that the better China play is China’s trading and venture partners.
For an exotic fund with pure potential, what of the following: a country with 20% of the world’s investable oil reserves, 33% of the world’s natural gas, and plenty of gold, diamonds, nickel, cobalt and other metals besides, the bulk of which is represented by a stock market with a market capitalisation of US$65bn. (compared with e.g. Microsoft alone at US$289bn.); a 99% literate population, a history of industrial production and an urban middle class that has pictured the real possibility of affluent lifestyles; a country that has weathered the storm, has political stability and has restored its finances. This is Russia. At its simplest, Russia is an infrastructure play writ large – a play on resources development, but also on the educational, legal and political infrastructure of the country. Perhaps the politics is not nice, but the politicians realise they are better off with the revenues of a functioning market economy rather than the slim pickings of command bankruptcy. It’s a good bet that that US$65bn market cap is 10x that 10 years on; the risks are the infrastucture development doesn’t happen (it is, albeit imperfectly), or counter-revolution – that could have ensued from the default and meltdown of 1998, but didn’t.
Ideas for putting a real exotic into your portfolio:
A dedicated Russia fund run by a Russian who grew up in the US, trained there, went back in 1994 and has run a fund in Russia since 1996, surviving the meltdown, as well as the friendly oligarchs (-89% 1998; +2,100% since 1998; +77% last year);
As one component of a triple play – also on India and China, but where the India and China managers can go short;
As part of a specialist, high concentration special opportunities fund, where you are using the experience of four niche investment managers aiming for no more than seven opportunities at one time, and targetting at least 100%, hopefully 1,000% on each. The Russia component currently is an internet/media IPO floated in London.
If you want the prospect of outstanding returns, such as 14,600%, you have to embrace the risk.
If this is for you, further information on exotic, niche and emerging market funds is available from:
Chris Cleary
Director
Banner Japan K.K
Integrated Investments, Tax & Estate Planning Services
These funds are available in a number of currencies. For further information please contact Banner Japan:
+81 (0)3 5724-5100; www.bannerjapan.com ; questions@bannerjapan.com
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January 19, 2006 | Permalink | Comments (0)
