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Another Bric in the wall

Chris Salih on Castlestone’s Next 11, a fund offering a way to tap newly emerging economies

Castlestone Management plans to launch its Next 11 emerging markets equity fund in the final quarter of this year.

Subject to regulatory approval, the fund, which will be run by portfolio manager, emerging markets, Arrash Zafari, is designed to be the next step after Bric for investors to tap into developing economies.

The fund will be able to deal weekly to allow greater flexibility to take less liquid positions.

The Next 11 tag was first coined in 2005 by Goldman Sachs chief economist Jim O’Neill as a follow-up to the Bric economies. The next tier includes Korea, Mexico, Indonesia, Turkey, the Philippines, Egypt, Vietnam, Pakistan, Nigeria, Bangladesh and Iran.

Zafari says the fund is likely to launch with around 30 stocks and a heavy focus on Korea, Mexico, Indonesia, Turkey and the Philippines. Those five countries are expected to account for 75 per cent of the exposure.

He says: “This offers a second shot at Bric-like opportunities. There are more countries as they are smaller than the Brics but, on aggregate, they have the chance to make similar returns.”

If Zafari is right, it would mean a big return for investors, given the performance of the Bric economies in the past 10 years.

Russia’s Moscow Times index, for example, is up by 616 per cent on a capital return basis over 10 years to the end of August.

“It is like Bric but closer to where it was in the beginning in about 2001. Goldman says the Next 11 will rival the G7 nations. It is a more diversified concept given the focal point for each of these countries is different, as opposed to the Brics that are dependent on China,” says Zafari.

He adds that the fund will maintain a reasonable cash holding but says it will focus on highly liquid instruments that could go to cash with no impact on the market, suggesting it will focus on large caps.

He says: “This is a complex strategy and we want to keep it as flexible as possible. There are 11 markets here and we are bound to run into difficulty with one of them at some point. This allows us to raise exposure in other countries instead.”

The fund currently has a minimum market capitalisation of £130m, though Castlestone says that is subject to change.

Hargreaves Lansdown head of research Mark Dampier says the fund is attractive in its almost niche take on a global emerging markets vehicle

He says: “It will be niche and volatile but could be successful as a long-term investment. People will be right to have concerns on liquidity as things will go wrong in those countries but these areas will be successes over the longer term. It depends on what types of investors go into the fund, with fast money likely to cause problems.”

Many will point to New Star’s Heart of Africa fund, which opened to much fanfare, only to dwindle from around £90m to £26m at closure due to liquidity concerns.

Bestinvest senior investment adviser Adrian Lowcock says there is little comparison as the 11 regions are at different stages of development, pointing to a country such as Korea as being at the more developed end.

He says: “This is a more adventurous version of a global emerging markets fund. We would not recommend it to new investors but for those at the more sophisticated end, it certainly is worth looking at in the longer term.

“I see it as a bridge between global emerging markets and single country funds but, more interestingly, between the world’s developed and frontier markets.”

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