Billionaire Roman Abramovich once noted that "investors have very short memories". It seems Alquity Investment Management are banking on him being correct. The London and Hong Kong-based start-up is launching an African equity fund just a year after a similar high-profile fund crashed and burned.
New Star Asset Management's Heart of Africa Fund was launched at the end of 2007 and by August 2008 boasted £86m of assets. But the illiquidity of African markets brought it down. Trading was suspended in December 2008 when the underlying markets dried up. The fund never reopened. New Star's fund managers at the time blamed everything from "elections in Ghana to religious holidays in Nigeria" for the collapse, says Steve Johnson in The FT.
But the real problem is that Africa's stockmarkets just didn't have sufficient liquidity to support an open-ended fund where investors can transact with the fund manager every day. That's why most open-ended Africa funds only offer fortnightly or monthly redemptions, often combined with extended periods so managers have time to raise the necessary capital.
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Despite this, Alquity's new fund will feature daily liquidity. Its managers believe they'll avoid the trap New Star fell into because the fund will invest in a broader range of stocks. "The New Star Fund concentrated on sub-Saharan Africa.
They excluded the three most liquid markets in the continent; South Africa, Egypt and Morocco," says CIO David McIlroy in The FT. But the worry remains that if investors charge for the exit the fund may be caught short of ready cash.
And it's hardly cheap. The annual management fee is 1.95% (albeit 25% of that will go to microfinance projects) and there's a 20% performance fee should the fund achieve returns above a benchmark based on the US interbank rate.
For investors happy to live with the risk of African investing, and who would rather not have to pick single stocks, we think there's a better way to get in. As Hugo Shaw of financial adviser Bestinvest points out in The Sunday Telegraph, investment trusts are better suited to markets with little liquidity as the shares are traded between investors so the fund manager is never a forced seller. He tips the Advance Developing Markets Trust (LSE: ADD) and the Genesis Emerging Markets Trust (LSE: GSS). These trade at an attractive 10.64% and 7.14% discount to net asset value respectively.
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