BlackRock is liquidating its Emerging Europe trust and offering investors the chance to buy shares in its Frontier Markets trust instead because of the ravages facing emerging market investors and political uncertainty in eastern Europe.
In a statement to the stock exchange, the board of the BlackRock Emerging Europe trust confirmed it was liquidating the £117m trust and investors would be offered the chance to either receive in cash the net asset value of the investments, minus the costs of the winding up, or receive shares in the Frontier market trust.
The action was being taken because the assets of the Emerging Europe trust would be below the minimum level which its board deemed necessary for it to continue to operate.
The board of the BlackRock Emerging Europe trust said in a statement to investors: "The proposals will provide shareholders with the ability to elect to rollover some or all of their interests into the Frontier Markets trust in order to enable them to maintain some or all of their exposure to a strategy managed by BlackRock’s highly-regarded emerging markets team."
Sam Vecht is lead fund manager of both trusts and while the Frontier Markets trust has returned 55 per cent over the past five years and lost 1 per cent this year so far, the Emerging Europe trust has lost 14 per cent over the past six months as geopolitical tensions in Russia and Turkey take hold.
The MSCI Global Emerging Markets Index is down 2.4 per cent over the past year.
In June the US Federal Reserve raised interest rates which, combined with a stronger dollar, is traditionally negative for emerging market investments because companies and countries in those areas tend to need to borrow in dollars, so a rising dollar increases debt repayment costs and reduces returns available to equity investors.
Turkey, to which the Emerging Europe trust has a 6 per cent exposure, has been particularly affected by these issues because its currency, the lira, has fallen in part because of government action.
Turkish president Recep Tayyip Erdogap recently appointed his son-in-law to the role of finance minister and believes higher interest rates create inflation. Conventional economic theory argues higher rates actually reduce inflation.
The Emerging Europe trust presently trades at a discount to net assets of more than 3 per cent, so investors who choose to accept their money back at net asset value would benefit.
Meanwhile the average premium at which BlackRock Frontier investment trust traded over the past year was 3.1 per cent.
The merger and issuing of new shares in the Frontier Markets trust is likely to mean the premium falls as the share price falls, which could be viewed as a negative for shareholders at that higher price.
The Frontier Markets trust has assets of £302m and the premium falling increases the liquidity in the trust, potentially making it easier for shareholders to find a buyer for their shares if they wish to sell in future.