It is good to see some signs of life in the investment company IPO market after an extended hiatus, as the team behind Ashoka India Equity (AIE ) has a go at launching a £100m trust with a wider emerging markets remit.

Money has flooded out of the investment companies global emerging markets sector with the loss of funds such as Jupiter Emerging and Frontier Income and Fundsmith Emerging Equities, plus Aberdeen Emerging’s reincarnation as Abrdn China (ACIC ).

Generally, funds in the sector have managed to make positive returns for investors in recent years, even after the knock from China’s Covid lockdowns, and the fall out from the invasion of Ukraine. However, with the notable exception of Mobius (MMIT ), which I discussed last November, most trusts in the sector trade on discounts.

The big picture investment case for emerging markets has not much changed over past decades: demographics, faster growth, the rise of the middle class, under-researched companies, and lower valuations. However, the 10-year returns from the sector are well behind those of developed market equities. Investors in the developed world, especially those in the US, have a strong tendency to pull money out of emerging market stocks when they are feeling risk averse.

Right now, that is the case and launching a global emerging markets fund seems almost contrarian (which may be a good thing!).

Raising money is hard, and the prevalence of discounts amongst existing peers makes that job even harder. Ashoka WhiteOak Emerging Markets Trust (AWEM) must counter this problem by convincing prospective shareholders that its shares will not slump to a discount in the aftermarket.

The prospectus lays out some discount control measures that could be deployed in that scenario. It says that share buybacks may be deployed to address any ‘significant’ gap to net asset value, though how much is not defined.

More impactful, I think, is a commitment to an annual redemption facility and a promise to provide the first of these at the end of 2023. If anything, I think that is overkill.

The most successful fund in the AIC’s global emerging markets sector currently is Gulf Investment Fund (GIF ). The region has benefited as investors (and fossil fuel buyers) look for alternatives to Russia.

When I was ranking the five-year performance numbers of all investment companies for last week’s article on Oakley Capital Investments (OCI ), it was notable that GIF was the best-performing of all funds investing in listed equities over that period.

However, GIF also operates an annual redemption mechanism. This year, after the run of good performance and with the fund trading at a small discount, the take-up for this was minimal. What might have happened though if there had been some geopolitical scare around the time of the redemption elections? The whole fund could have disappeared. 

I think annual redemption opportunities can help keep discounts narrow but it is reasonable to limit these to about 25% of the register.

AWEM will hope these measures will be redundant, at least in its early years. The manager has built up a loyal following on the back of its success with AIE, a Citywire award-winner last November. That trust has delivered returns well ahead of its index benchmark since it its launch in July 2018. I am one of the happy shareholders. Perhaps that investor base can be persuaded to back the new issue.

AWEM shares several characteristics with AIE. Most notably the fee structure – which has no base fee, but instead a performance fee where the manager takes 30% of all the return generated above the benchmark (subject to a cap, and measured over three-year periods).

Some investors seem to love this approach; for those that obsess about ongoing charges (seemingly in some cases to the exclusion of looking at the actual performance record), it is ideal. However, I crunched some numbers on AIE when AWEM announced its intention to float. By my reckoning, the manager has earned £7.9m from AIE, but had there been no performance fee and a 1% base fee instead, that figure would have been about £5.6m.

AWEM will also follow a similar bottom-up driven approach to investing, and the portfolio will be very diversified (100–200 holdings). Stock selection and ESG (especially governance aspects) will drive asset allocation. AWEM will be able to hold some developed market equities with significant emerging markets exposure – up to 10% of the portfolio – and up to 10% in other developed market equities which may have some emerging markets exposure.

My initial concern was that, given the success of AIE, the portfolio would be heavily skewed towards India (which as some readers in the forums have noted is looking relatively expensive). An illustrative top 10 disclosed in the prospectus suggests otherwise. The illustrative geographic asset allocation (which doesn’t have a country-by-country breakdown) suggests a significant bias to Asia (like the MSCI Emerging Markets benchmark) but has nothing in the Middle East (which is over 7% of the benchmark and growing).

The closed-end structure allows the manager to hold more in smaller companies than it would do in its equivalent open-ended fund. There is no plan to use gearing, though, on the grounds that it is fruitless trying to time markets.

That open-ended fund does not have much of a track record, and that underscores that an investment in AWEM is something of a leap of faith. The ability to cash in your investment in around eight months’ time if it is not working out is a comfort, however.

James Carthew is head of research at QuotedData.

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