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Heart of darkness

New Star’s problems intensified last week when Jamie Allsopp’s Heart of Africa fund was temporarily suspended from trading.

The fund launched in November 2007 with a £100m cap but strong sales meant that by summer 2008, New Star was considering lifting the ceiling.

However, market conditions have seen the fund shrink markedly and at the time of its suspension on December 11, the assets had dwindled to £29m.

New Star says prospects for the sub-Saharan region remain strong but the impact of the credit crunch has seen a huge increase in redemptions while events in Nigeria and Ghana, where 51 per cent of the fund is invested, have also played their part.

Nigeria, where the fund invests 30 per cent, has seen the reparation of monies into the region delayed by restricted foreign exchange flows. At December 11, the fund had $6.2m of proceeds from disposals awaiting repatriation from Nigeria.

In Ghana, where 21 per cent of the fund is invested, the market has been less liquid than normal and trading volumes have been lighter as a result of uncertainty ahead of the general election.

Allsopp says: “Since launch last November, the fund has performed relatively well amid the turmoil of the past year, falling by 24.4 per cent. This compares favourably with the 38.78 per cent fall in the MSCI emerging markets total return index. The FTSE All Share total return index has fallen by 29.8 per cent over the same period. Despite this temporary suspension, I still believe that the fundamental prospects for the region remain attractive over the medium to long term.”

Heart of Africa’s initial success prompted other fund managers to join the market, notably Investec, but Informed Choice director Martin Bamford believes the news shows the frontier markets story may have come a bit early.

Bamford says: “It is a fund that we have not exposed our clients to. I believe that New Star should have stuck to its knitting and not looked to start trend setting with these sorts of offerings as it can be easy to get caught in the hype.”

Investec fund manager Roelof Horne believes the fundamental cause for investing in Africa remains strong despite the downturn. He points to the fact that not all markets have been hit to the same extent by recent financial turmoil. For example, the Egyptian Hermes index is down by 54 per cent in 2008 while the Ghanaian market has risen by 63 per cent. Overall, the average market fall is 8 per cent in local currencies in the year to date.

Horne says: “We may see depressed growth for some time but equity markets on the continent are likely to recover quickly when the real impact of local economic activity is seen in corporate earnings’ growth.”

He also points to African pricing and fundamentals being divorced from other markets. He says Africa is one of the least integrated markets in the world and domestic growth is still expected to outstrip developed markets.

However, he also highlights political unrest and the falling oil prices as having a material impact on producers.

One concern for investors in the Heart of Africa fund has been that the losses have come despite careful drip-feeding of money into the African market in a bid to avoid any liquidity issues.

Hargreaves Lansdown senior analyst Meera Patel says Allsopp’s aim is to be fully invested and the restrictions in Ghana and Nigeria were unforeseen.

Patel says: “I have always said this is a 10-year investment and that remains the case today. If the problems at New Star were to see something happen to the product, that would be a shame but investors need to recognise that this product was at the top end of the high-risk spectrum and that to expect no volatility was unrealistic.”

Chelsea Financial Services managing director Darius McDermott says: “Heart of Africa is the only fund in our range with an 11 out of 10 risk rating because of the political concerns we have seen from the likes of Kenya this year. I would place a small portion as a diversifier and it has lost less than most other emerging markets funds but the fact that it carries a health warning on stock, currency and geopolitical problems makes it a product with a high-risk nature.”


Libor nears 3%

Three-month Libor has continued to drop closer to 3 per cent.


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