Chairman’s view


value for shareholders and be ill-equipped to meet the growing challenges of seeking improved yield for shareholders in difficult economic times. Often, having spent much of their professional lives in a world wider than that of fund management, they bring plain vanilla commercial judgement to a world increasingly dominated by impenetrable jargon and an advancing army of complex investment instruments. A constructive engagement between independent directors and management means that any significant change of investment direction comes under close scrutiny before it happens.


Identifying emerging market hazards In a financial world where the tectonic plates are shifting quickly, the challenges facing independent directors are changing, too. There is much more focus on identifying risk at every level of the business; risk of failure of the manager’s systems; counterparty risk, where financial failure of a service provider to the fund, could place the fund’s assets in hazard; and, in emerging markets, identifying risk in countries where the governance rule is often obfuscation, not transparency. Emerging markets are the focus of the funds on whose boards I serve and Aberdeen’s investment process – investing in companies their managers have met while undertaking “feet on the ground” due diligence – keeps directors’ feet in the ground, too. Hazard in emerging markets can hardly


astonish. In the 17th and early 18th centuries the Darien scheme in Panama bankrupted Scotland, forcing the country into union with England. The Mississippi Bubble of 1718 – 1720 led by John Law, the quixotic Scottish economic genius who bizarrely came to head up the French Treasury and single-handedly invented fiat currency, which destroyed the French economy for two generations, fomenting the discontent that led to the revolution of 1789. During the English South Sea Bubble of 1717, the British government decided the South Sea company was “too big to fail” and created a guarantee fund, investing the then enormous sum


“Independent directors are more than the defender of shareholders' interests; independent directors are custodians of public interest.”


by creating credit, now called quantitative easing, of £20m ($32 million), or today’s equivalent adjusted for inflation of £4.5bn or $7.1 billion, which diluted shareholders out of sight – sound familiar? – nearly dooming the then nascent City of London.


That's where the growth is The fundamental risk hasn’t changed in 300 years. Following “top-down” only strategies, ETFs and index trackers may be all very well when the herd is bullish, but when the bears take over, a solid balance sheet, transparent accounting and a history of delivering dividends beats perpetual growth hype every time. We back Aberdeen’s strategy of being long- term investors with influential holdings in companies whose stocks and bonds they buy. Directors now attend, when possible, examples of “due diligence” sessions when fund managers quiz company management in depth about structure and prospects face to face. Witnessing that dialogue first-hand gives a rational basis for directors’ support for long-term investment decisions, even through market troughs. After all, the ideal share to own is one you never want to sell. What’s the rationale for emerging


markets? Well, when Slick Willie Sutton, one of the FBI’s most wanted in the 1930s, was asked why he robbed banks, Willie replied pityingly, “Because that’s where the money is.” So, to the “Why emerging markets question” the answer is: “Because that’s where the growth is.” Growth in emerging markets held up surprisingly well during the current crisis. And over the next 5 years growth in the developed world is predicted at 1.5% – 2%. For the emerging world as a whole it’s 5% – 6%. In the past decade emerging market


growth has outpaced developed countries by around 4%: 50% of global growth now comes from emerging market countries. But what is even more encouraging is the underlying structural change that supports


that growth. On four critical measures of macroeconomic risk that previously plagued emerging economies and provoked the 1997 Asian economic crisis, things are looking good. They are: external and public debt as


a share of GDP; size of the fiscal deficit; external current-account balance and the change in domestic leverage. The Far Eastern Economic Review “stress index,” using these measures, has fallen (using a scale of 1 -10) from 9 in the early 80s to almost zero today. In short - emerging market countries have sorted out their balance sheets. We could learn a thing or two in the West. Apply those measures to the US and EU economies today and we’re bust.


Closed-end funds are an ideal


investment vehicle to address these markets. Simply put, the closed-end structure means that in volatile markets the underlying assets remain intact and investors in the fund can ride the rises and falls in the markets without the fund evaporating before their eyes. They are a buffer against lemming like asset sell-offs in difficult times.


Closed-end funds have a global history dating back 150 years.The longevity is because they have evolved to weather the different storms financial crises bring. Operating within a structural framework that has now stood the test of time, they stand ready to continue to serve investors well.


Mr. Malone previously served as a Minister of State in the United Kingdom Government. Mr. Malone currently serves as Independent Chairman of a London AIM-listed company specializing in healthcare software and a privately owned pharmaceutical company. Previously, he also served as a director of Regent-GM Ltd., a firm operating in pharmaceutical manufacturing. Mr. Malone began his directorship of the Aberdeen Funds in 2001.


9


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24