Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN Tuesday - Emerging Markets
Tuesday, December 5, 2005
Q. Don, the emerging markets area has been pretty hot lately... any thoughts?A. Absolutely right. EM funds are up over 25% this year, with Latin Americain the lead at 51%. We're seeing some related reaction in closed-end funds...
Q. How so?
A. Well, we've noted a tendency, historically, for closed-end funds toconduct rights offerings after their shares have done very well.
Q. Maybe we need to step back and have you define both closed-ends andrights offerings.
A. Sure. A closed-end fund is a fund that does not stand ready to redeemits shares every day the market is open. There are about 640 of thesefunds, and most trade on stock exchanges to allow investors to buy andsell.A rights offering is a prospectus-based securities offering that is made toexisting holders of a stock or in this case a closed-end fund. The companyoffers to sell additional shares, usually at a discount, in a ratio of onenew share for every several you already own. Common ratios are 1:3, 1:5,and 1:10.
Q. Okay, so you said you are seeing some rights offering activity inclosed-ends lately?
A. Right, and I think I see some reasons to be concerned.
Q. How so?
A. Well, there is a tendency, not just in closed-ends but all over theinvestment world, for people to get excited late and therefore for salesorganizations to sell the products that are easy to sell--what has alreadydone well, so people have heard about it.
Q. So, how do rights offerings relate to that?
A. Underwriters and fund management companies know when it would be easy tosell new shares to the public. That is after performance has already beennice for some time.
Q. And what is going on in closed-end rights offerings that is concerningyou?
A. Well, we have seen a burst of new offerings this fourth quarter. Since1999 the average number of closed-end fund rights offerings has been fiveper year. This quarter we have seen five filings already started.
Q. And how does that tie to emerging markets funds?
A. This quarter, all five of the offerings are of that type--funds for:
- Mexico
- Central Europe/Russia
- China
- India
- and a world high-income fund that invests in emerging marketsdebt
Q. And how does that compare with past years?
A. In the past seven years, we have seen a total of three rights offeringsin emerging markets types of funds. Now we have five in one quarter!
Q. So, what is the message for investors?
A. Without making specific recommendations on the funds involved, I wouldsay this is probably a caution sign to be careful of not chasing thingsthat are very hot.
Q. Are all five of those areas you mentioned pretty hot now?
A. The only one that has not been is China, which had a strong run a coupleof years back but has been resting since then: up 9% last year and just 3%in 2005.
Q. So, how should investors make decisions?
A. Start with asset allocation--to make sure your money is in line with yourgrowth needs and risk tolerance--then look at individual possible holdings.
Q. Sounds like the contrarian philosophy...
A. Right. Not everything that is down, especially individual stocks, willnecessarily come back. But kinds of funds that have been out of favor tendto rotate back into favor. And you can look back calmly and see whichmanagers have done well in a flat or bad market, not just who is "screamingahead" the fastest in a strong market.
#
Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
To read more Interviews, please visit the column archive.
