Merrill Lynch began trading its latest tech fund last Friday, focusing on the telecoms and tech industry in emerging markets, with a seed capital of $5 million from the manager's own pockets. The fund is an addition to the company's $15 billion Mercury Selected Trust family, investing in sectors from semiconductor equipment and wireless telecommunications to electronic equipment and IT consulting and services.
Called MST Emerging Markets TeleTech Fund, it aims to invest in "small to medium growth stocks" in Asia, Latin America and EEMEA (emerging Europe and Middle-East and Africa). Countries that are covered include Taiwan, Korea, India, Brazil, South Africa, Israel, Turkey and Russia.
According to fund manager Ali Khalpey, the fund has identified four trends that will make emerging markets a worthwhile investment. First is the sheer size of the market. In China, for example, although only 3.9% of the country's 1.3 billion population has a mobile phone, mobile phone companies are returning in excess of 50% a year. Khalpey believes similar opportunities can be identified in countries such as Brazil, Russia and India.
Second is the trend of convergence. Khalpey argues the ease of technology transfer is allowing technologies to be adopted quickly by companies in emerging countries where, in some cases, it has enabled companies to skip entire stages of technical development, hence saving large amounts of capital expenditure. As two-thirds of the world's population live in emerging economies, the potential for leveraging technology is seen to be huge.
"We are now at a critical inflection point in the growth cycle," says Khalpey. According to the manager, technology adoption levels in the emerging market are set to create substantial wealth across the regions, further enhancing growth.
"In India, for example, the growth in wealth generated by the technology industry is helping to stem the brain drain that has affected the country over the past decade," he says. Because of the Y2K work that was outsourced to India last year, it now has become the country of choice for western companies outsourcing their software services. The industry has brought in $80 billion so far this year, and the figure is expected to grow to as much as $150 billion by 2004.
Lastly, emerging markets companies often are valued at a deep discount, trading on levels that are significantly lower than those of their developed market rivals. Khalpey believes the potential for this gap to narrow represents some highly attractive investment opportunities.
The Luxembourg-domiciled fund charges an annual management fee of 1.5% with a minimum investment of $5000. It will be benchmarked against the MSCI index for emerging markets of telecoms and information technology.