If ever there was a measure of a boom in financial services it must be the growth of investment funds. Since 2002 there was a rise of 31.6% to a huge 32,941 funds in Europe. To put this into perspective this total for Europe is four times that of the USA, which just underlines the rather disparate nature of Europe divided by language, culture and markets. It also implies that Europe has a disproportionate number of smaller funds, with the likelihood of higher costs (total expense ratios) and less cost efficiency – which is a polite way of saying that you are less likely to make as much money with the smaller European funds than with the larger scale US versions where the costs should be spread more thinly.

The effect of the recession has been to see not only a reduction in launches but also a significant increase in closures and mergers. According to Morningstar^TM 1,439 funds were liquidated or merged across Europe and Asia in the first quarter of 2009 – a 60% increase from the previous year.

Mergers and closures not unsurprisingly disturb investors, and they will tend to disinvest if they feel they are just being passed around as an unwanted nuisance. Equally, investors should be on their guard to ensure that they are not just being shoe-horned into a convenient larger fund simply to reduce that fund’s management costs and headcount – you could easily end up in a fund that might be significantly different from what they wanted to be in. We have already seen examples of investors in a green fund suddenly being pushed into an emerging markets investment, and a food and retail fund mercurially becoming “basic materials”. Not exactly what I would call “treating customers fairly” – more like “stuffing customers into anything more cost effective – for us!”

There will be more closures to come. Some will be for poor performance, some with poor liquidity who cannot manage any withdrawals, and others because they are just too small to be cost effective. Unless they are a very specialist or a low cost fund, then anything below £20 million is unlikely to have the right economies of scale and thus the underlying costs to the investors may well be too big a drag on performance and returns – if there are any.

Investors should be watching their fund managers carefully to ensure that their perfectly formed portfolio doesn’t turn into a basket of unwanted strays and misfits.

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The emerging markets have not been in any way immune to the global downturn and in fact are at the weakest end of the globalisation chain. Yet in a world of economic slump, some of these markets have shown a certain perkiness in contrast to the more mature developed indices. Now not all of these markets have joined in and certainly the Eastern European markets have suffered, especially where they are so exposed to the German economic influence.  In many ways this almost seems like a European version of the Asian crisis back in the late nineties, where depreciating currencies paid the price of borrowings in stronger foreign currencies – namely in this case the Euro and the Swiss Franc.

However there are some other notable exceptions with three of the BRICs; Brazil, China and Russia all showing positive gains and India with only a marginal loss. The key issue for the first three will have been commodity price effects which were relatively positive during this period.  Additionally the G20 injection package added some further encouragement – but do remember that these facilities are only provided when countries are already in trouble – perhaps a sign of worse to come?

Nevertheless, the risks have not gone away as global trade continues to show such weakness. This has been perfectly illustrated by that plump fresh grape that was the dynamic economy of the island of Singapore (although not an emerging economy itself but a perfect trade thermometer as one of the world’s great entrepots) fast turning into a shrivelled raisin as global commerce dries up.  However, as the cycle continues there will be a bottom forming in global output and with any sign of improvement then it can be logical to see these affected emerging markets have some recovery first.

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And finally….news of the ultimate wonder bra. Recently a Brazilian lady was saved from certain death when she was caught up in a shootout in Brazil. 58 year old Ivonete Pereira de Oliveira was hit on the left side of her chest but the bullet was prevented from reaching her heart by defensive action of her bra and its somewhat unusual extra contents – namely a small wad of 150 Brazilian Real (around £50). Is this not just a tale of effective forward security planning by this lady in an emerging economy, but possibly also a testament to the growing strength of the Brazilian currency?

Have a good week,

Justin A. Urquhart Stewart

Director

Seven Investment Management Limited