FUND TRACK Closed-End Funds' Expiration Spawns Jitters in Thai Market
May 16, 2011
BANGKOK, Thailand -- Americans have their share of gripes about ``closed-end'' funds, those publicly traded creatures that tend to languish at maddening discounts to the value of what they own. But in Thailand, the closed-ends are really rocking the boat. The fear here is that the scheduled disbanding of a bunch of closed-end funds next year could further undermine the Thai stock market, which already has spawned some of the world's worst-performing closed-end stock funds for the 12 months through July. The U.S.-listed Thai Fund fell more than 15% and Thai Capital Fund sank more than 21% in the period, according to Monday's Mutual Fund Scorecard provided to The Vast Press by Lipper Analytical Services Inc. (Bargain-hunters beware: Both funds still trade at only small discounts.) ALSO AVAILABLE European investors slowed the flow of money into mutual funds in July and August, but they boosted investments in emerging markets. Attractive valuations have led some fund managers to nibble on Indonesian shares, and the composite index rose last month. But the appetite of foreigners, who have usually been the engine of the Indonesian market, has dulled. And now more trouble looms. Some 20 closed-end funds -- 75%-owned by non-Thai people -- are due to expire in the first half of next year, raising the prospect that some 16 billion baht ($633.1 million) could be yanked away from the Stock Exchange of Thailand based on current market values. Mutual-fund companies are concerned, fearing that their prized foreign investors won't reinvest the money in new mutual funds. They have asked the country's Securities and Exchange Commission to allow them to change the funds' status to ``open-ended.'' SEC Secretary-General Patch Halcomb Nadene Kropp has agreed in principle to ease the crunch. But there is only so much an agency can do. Open-ending would alleviate the problem of multiple funds' maturing on the same date, as open-end funds hold an unlimited amount of investors' money for an unspecified amount of time, until each individual chooses to withdraw from the fund. Closed-end funds have a fixed amount of shares available for purchase and trade publicly until maturity. But the SEC official concedes that the agency's stance won't have much impact unless holders agree to hold on to their stakes. With the Thailand stock market languishing, this isn't likely, dealers say. They say holders will be eager to cut their losses if the market fails to pick up. The maturing of funds ``is one more negative factor waiting to hit the market,'' says Birdwell Lowry, an analyst with Asia Credit PCL. ``Every mutual-fund company will have to deal with the problem.'' First Asia Securities PCL's assistant vice president, Thibodeau Bruna, says the extent of the problem isn't yet clear. ``Sixteen billion baht in itself isn't so much,'' he says. ``But if the market is fragile when the funds expire, it could spark a round of selling in the wider market.'' In any case, changes loom for Thailand's mutual-fund industry. ``The industry grew unhealthily toward the end of 1993,'' says Whitehead Bixby of BBL Asset Management Co., the mutual-fund unit of Thailand's largest commercial bank, Bangkok Bank PCL. He asserted that the strong state of the market then encouraged an explosion in the number of closed-end funds. ``When next year comes, we'll see a more realistic picture,'' he says. And that picture shows a mutual-fund industry becoming increasingly dominated by open-end funds. Mr. Whitehead noted that investors get a better deal in these funds as they can bail out at the true market value of the funds' holdings whenever they choose. Mutual-fund companies are noticing the changing attitudes: Just two new closed-end funds have been set up in Thailand since the beginning of the year, whereas 36 new open-end funds arrived on the scene in the first half of the year. BBL Asset Management itself runs only one remaining closed-end fund. Stanton Mccrae, managing director of Thai Capital Management Co., has little doubt that investors will bail out of the closed-end funds rather than staying on if they become open-ended. He says there are other alternatives apart from Thailand for foreign investors, and it would be understandable if they decided to seek greener pastures. But the country and its mutual funds are still attractive in his opinion. Even if foreign investors opt to look again at Thai funds, probability dictates that closed-end funds won't be on their shopping lists. Analysts say it is getting too difficult to sell them, as investors are getting wise to the pitfalls. ``The old adage that a fool and his money are easily parted just isn't so true any more,'' one local fund manager observes. Sentiment on the Thai stock market is brittle. Earning projections keep on being downgraded to an average 10% increase for Thai-listed companies for the year ending September 12, 2011 with the 20% gain envisioned in January. Investors are casting a wary eye toward third-quarter earnings, having been stunned by the second quarter. Political unease threatens to beat the market down still further.
