For investors, a general rule of thumb is that frontier markets are to emerging markets what emerging markets are to developed ones. They are more risky, but have the ability to generate higher returns.
Unlike emerging markets, frontiers are spread right across the world rather than being concentrated just in Asia and Latin America. That said, one of the biggest frontier markets is Africa and the Middle East, a geographical subset that more and more funds are targeting.
A quick look through the IMA sectors reveals 12 frontier-related funds, of which eight have an African or Middle East and North Africa (Mena) remit.
In recent years the Mena region has been under stress following the Arab Spring and political and economic turmoil, but with both Qatar and the United Arab Emirates scheduled to be upgraded by MSCI from frontiers to emerging in May, this is likely to bring a spotlight on the region as a whole. In addition, there is the potential for new markets to open up, including Iraq, Iran, Cambodia and Myanmar.
Of the 12 funds identified in the IMA sectors, the two best performing for the three years to April 3 were the two specific Mena funds from Barings and Franklin Templeton.
The $14.4m (£8.7m) Baring Mena fund, run by Ghadir Abu Leil-Cooper, topped the peer group with a three-year return of 55.68 per cent, while the $180m Franklin Templeton Mena fund managed by Stephen Dover and Purav Jhaveri returned 51.96 per cent.
Only three of the frontier-related funds produced a negative return in the period, however even the best return was overshadowed by the performance of the $52.1m Independently Managed Africa Opportunity investment trust. The company, which sits in the AIC unclassified sector, returned 66.19 per cent.
But in the past 12 months, the tougher market conditions and negative of sentiment in emerging markets seems to have perhaps had a knock-on effect, with just four of the IMA-listed funds producing a positive return, again topped by the two Mena vehicles.
Oliver Bell, manager of the $45.8m T Rowe Price Middle East and Africa Equity fund, adds: “This region is a bit like the emerging markets of the 1990s: you get exaggerated economic cycles; you get booms and busts and the busts are what you want to avoid.”
But, in spite of this, the continuing development of these markets and the flexible nature of the opportunities make them attractive to a number of investors.
Michael Levy, manager of the Baring Frontier Markets fund, explains: “The lack of correlation relative to other emerging markets and developed markets is clear. Growth is very strong in these regions. A lot of the growth drivers are similar to those we saw in emerging markets 20 years ago, and those are now in their infancy in Mena and the frontiers.”
THE PICKS
Franklin Mena
This $180m fund, managed by Stephen Dover and Purva Jhaveri, has delivered consistent performance, sitting in the top two of the peer group of 12 Mena, Africa and frontier-focused funds across both one- and three-year periods. The 12-month performance to April 3 of 33.53 per cent is almost 14 percentage points ahead of its nearest rival, the Baring Mena vehicle. Its largest geographical weighting is to Saudi Arabia at 31.69 per cent of the portfolio, while the largest sector position is in financials at 60.63 per cent of the fund.
Magna New Frontiers
One of the many new entrants into this area, the ¤17.7m (£14.6m) fund was launched in March 2011 and is managed by Stefan Böttcher and his team. It is a fairly concentrated portfolio of between 40 to 70 holdings, with the portfolio currently at the lower end of the spectrum with 42 positions. Its three-year performance is a respectable 8.56 per cent, according to FE Analytics, although it has significantly improved in the past 12 months, delivering a return of 18.7 per cent. Although small it could be one to watch.
EDITOR’S PICK
BlackRock Frontiers Investment Trust
Managed by Sam Vecht and Emily Fletcher, this £170.5m investment trust has stood out among its peers. Since launch in December 2010 it has returned 19.16 per cent, ahead of the MSCI Frontier Markets index return of 16.03 per cent, and it has also outperformed the index across one- and three-year periods. Still a year shy of its five-year record, it has nonetheless performed well in some tricky markets, with its highest geographical weighting currently in Qatar at 13.2 per cent of the portfolio.
