FIFs to grow despite falling asset values

Despite falling net asset value (NAV), foreign-investment funds (FIFs) are expected to grow for the rest of the year, says the Kasikorn Research Centre (KResearch).

According to the research firm, total NAV of all FIFs fell as much as 17 per cent, from Bt209.27 billion at the end of last year to Bt173.64 billion on April 11. However, NAV has rebounded to Bt199.67 billion as of April 18.

The number of FIFs as of April 11 totalled 134 funds, of which six were equity funds, 68 fixed-income funds, 54 fund of funds, and six mixed funds.

The fund of funds sector - funds that invest in other funds - saw the biggest fall in NAV, by 8.8 per cent as of April 11, compared to the end of last year. Most of the fund of funds are feeder funds that must invest 80 per cent of total NAV in one foreign fund or master fund.

The fall in NAV of fund of funds was mainly because some master funds, which invest mostly in equities, have experienced a significant reduction of NAV from the impact of the sub-prime mortgage crisis. It also resulted from redemption of Euro Commercial Papers (ECP). Many fixed-income FIFs have invested in ECP, which is commercial paper with less than one year of maturity, issued during the second half of last year by commercial banks or corporations with high credit ratings. Once these ECPs were redeemed, the NAV of fixed-income FIFs declined.

In addition, once the US Federal Reserves cut its policy rate aggressively from September 2007, ECPs became less attractive with lower returns than government bond yields.

KResearch said the outlook of FIFs for the rest of this year depends on several factors.

The firm suggested that the current interest rates of some foreign countries are still higher than Thailand's rates. Hence many fixed-income FIFs are expected to be more attractive, particularly funds investing in short-term foreign government bonds.

With rising inflationary pressure around the world, global interest rates are expected to shift from a downward trend to an upward one. However, investors must further monitor the US economic indicators. So far, 80 per cent of newly issued FIFs this year are fixed-income funds investing in Australia, New Zealand, and South Korea.

In addition, as commodity prices are expected to remain high for the rest of this year, FIFs investing in foreign commodities, including structured products, will be attractive.

Rising oil prices, which push up the prices of most commodities, are also a key factor investors must consider as several FIFs invest in commodities. KResearch anticipates that oil prices may not ease for the rest of the year as many had earlier forecast.

The research firm suggested that investors should consider the foreign exchange and political factors of the countries that FIFs are to invest in.

For example, the US economic growth is expected to slide towards recession in the first half of the year. This will negatively affect the economy of the eurozone and Japan. The International Monetary Fund has revised downwards its forecast of world GDP, from 4.1 per cent announced in January to 3.7 per cent.