Focus: Following the hot money

Yesterday’s news is tomorrow’s fish-and-chip paper, sang Elvis Costello. But for the fund management industry, very often yesterday’s news is tomorrow’s profits.

Investors in New Star’s much-vaunted Heart of Africa fund learned this the hard way. They are now nursing severe losses of more than half their money after the fund collapsed under the strain of liquidity problems and redemption calls at the beginning of this year.

How different the situation was just 18 months ago, when the product was launched. Equities in many African countries had been rising on the back of encouraging economic growth prospects, supported by China’s apparently insatiable thirst for natural resources to drive its manufacturing juggernaut. Increasing political stability was an added attraction.

In the year to the end of December 2006, Nigeria’s SE All-Share index shot up by 55 per cent. The MSCI World index achieved a more meagre 12 per cent rise during this period, while the FTSE returned 8 per cent.

These numbers are difficult to resist, and fund management groups - keen to attract investors and grow their business - know that all too well.

“When certain markets start to rise, investment groups often use that as an opportunity to sell a good story and gather assets,” says Tim Cockerill, head of research at Bath-based IFA Rowan & Co Capital Management. "Very rarely do you see a fund management firm launching a product that is not in step with investor sentiment.”

“In the first half of last year, you couldn’t turn the pages of the financial press without seeing a new Middle East and North Africa (Mena) fund being launched,” says Gary Potter, co-head of multi-manager at Thames River Capital.

With high inflation and rising interest rates in China and India, Bric investments suddenly seemed unfashionable compared with Mena.

These funds tantalised investors with the opportunity to get exposure to the oil riches of the Persian Gulf, including the United Arab Emirates, Saudi Arabia and Kuwait, at a time when oil prices were setting new records almost every day.

The local stock market in Dubai had surged 50 per cent in the 12 months to the end of April 2008, while in Saudi Arabia equities had gained more than 30 per cent. Meanwhile, the FTSE 100 was down 6 per cent and the MSCI World index had also fallen, down 9 per cent.

Reassurance that their target markets had very little correlation with their troubled developed counterparts also struck a chord with investors. But Mr Potter remained on the sidelines.

“The region has been getting rich off its oil exports for years, but when all these products were coming out, we were on the brink of a world recession, which would cut government spending on infrastructure and sink oil prices,” he says.