Significant underperformance from the Aberdeen Frontiers Markets investment trust has triggered the board to launch a tender offer for 15% of shares.
The board will also shake up its discount control policy just 18 months after introducing its current policy.
Aberdeen Standard Investments’ emerging markets team, led by fund manager Devan Kaloo (pictured), has lost shareholders 12% over the 12-month period ended 30 June compared to a 1.7% return in the MSCI Frontier Markets benchmark. The trust’s net asset value fell 10.3% over the period.
Trump and US Fed compound shareholder losses
The board blamed the “very disappointing” performance on several factors in a regulatory filing issued on Monday. At a portfolio level, they said Pakistan, Sri Lanka and Vietnam exposure had hit absolute and relative performance, while its underweight in Kuwait missed major gains from the strong oil price.
The Trump trade war and rising US interest rates had also hit emerging markets sentiment during the period that triggered the tender offer. The discount mechanism comes into effect when the share price falls lower than 10% against the net asset value over the three-month period preceding the full-year results.
In June 2017, the portfolio transitioned away from a fund of funds to a direct equity mandate.
However, it has underperformed over longer periods sitting the fourth quartile of the Global Emerging Markets investment trust sector.
Cash exit for underperformance
While the existing discount control policy was only introduced in March 2017, the same time the direct equity investment policy was introduced, the board announced it was dropping discount triggered tenders.
Instead it wants to give Kaloo and his team two years to prove its direct equity strategy before offering shareholders a cash exit at net asset value less costs.
Continued underperformance of the investment trust for the period from 1 July 2018 to 30 June 2020 would trigger the cash offer.
In a statement, Kaloo said frontier market economies are projected to deliver strong economic growth over the next few years. “Markets have been volatile over the past year, but by meeting regularly with company management and through rigorous due diligence we firmly believe many businesses offer the potential to provide long-term returns to investors.”
Fees threat from tender offer
Aberdeen Standard Investments has agreed to shoulder some of the fee burden from a potential fall in the investment trust’s net assets, which currently sit at £48.2m.
Where the ongoing charges ratio (OCR) exceeds 2% in any annual period, the manager will rebate up to a third of their management fee to keep it below that level. Currently it sits at 1.66%, according to Trustnet.
The board said shareholders representing approximately 60% of votes have said they are in favour of the tender offer and the introduction of a cash exit policy.
Each shareholder is entitled to tender up to 15% at approximately 98% of the investment trust’s NAV. It will be funded through cash and a realisation of part of the investment trust’s portfolio.
Shareholders will vote on the proposals at an extraordinary general meeting (EGM) on 17 October.
