First-ever Iran equity fund for foreigners

At the end of this month the first-ever Iranian equity fund open to foreigners will close with an initial capital of 50m euros.

For the past three years the Tehran stock market has headed resolutely northwards, showing impressive annual rises of 43%, 23% and 42%. The first five months of 2003 have seen the TEPIX gain a further 15%.

If this sort of performance continues, and fund manager EFG Hermes thinks it can, then investors who stump up a minimum of 100,000 euros for the First Iran Fund will do very well.

'We see Iran as a commodities play,' says Executive Director Tristan Clube. 'Iran will follow the Chinese model of reform and is opening up its economy with tariffs coming down.

'Iran's stock market is being driven by surplus liquidity from the oil and gas sectors. But valuations remain at very attractive levels with the market on a p/e ratio of 9.5 and yields are high. In addition, many companies have access to low cost finance and there is consolidation going on creating larger units.'

Dr. Clube has been visiting Iraq for the past two years and will open an office in Tehran later this summer. The fund is being sponsored by the Iran Foreign Investment Company and four secondees from the IFIC will be trained in Egypt by EFG Hermes to man the local Tehran office.

'We need a combination of international expertise and local information down on the ground to operate this fund,' explains Dr. Clube. 'We will invest initially in 20-35 companies.

The fund will invest no more than 20 per cent of its capital in any single company. And investors will be able to pull out their capital on a quarterly basis and invest once a month. The management fee is a modest 1% and upfront fees around 3%. There is also a performance bonus.

This appears about as good as investors in Iran are going to get in terms of a reputable investment fund structure. But there are risks as well as rewards to being a pioneer in investment.

The fund's prospectus lists the risks in full. The Iranian market could be volatile, and inflation of 15% knocks yields of 15% down to zero. The foreign investment infrastructure is very new, and indeed new bylaws on ownership are still awaited.

Iran is also subject to investment restrictions for US citizens, accounting standard do not meet international standards, and there is currency risk, plus the risk of nationalization and changes in legislation. Furthermore, any further regional conflicts may impact, or even actually involve, Iran which would obviously impact on equity prices.

However, Dr. Clube points out that Iran's currency has been stable against the US dollar for sometime and that the present atmosphere favors further economic reform and greater openness. Clearly this is an interesting, but high risk investment and not one for widows and orphans.