Frontier markets performing strongly, in spite of risk

The same is true for the year-to-date performance figures, with data from FE Analytics showing the MSCI Frontier Markets index return of 11.32 per cent significantly outstripping its nearest rival, the MSCI Europe index, which produced a return of 0.32 per cent.

In addition, the MSCI indices for North America, AC World and the Emerging Markets all posted losses in the same period, with the MSCI Emerging Markets index continuing to trail behind with a loss of 0.86 per cent.

One of the possible drivers behind the strong performance of frontier markets is their uncorrelated relationship with other emerging and developed markets and between the frontier constituents.

The 26 countries covered by the index – soon to be 24 when Qatar and United Arab Emirates (UAE) are upgraded next month – include a group as diverse as Ukraine, Vietnam, Mauritius, Lebanon and Nigeria.

Working on the same premise as many multi-asset funds, this wide cross section of countries means that should one part suffer – a prime example being Ukraine – other strong performers can more than offset the drag on performance.

In terms of the funds specialising in frontier markets, there are effectively three different types: those that have a broad spectrum of frontier markets, those that focus on emerging markets but include frontier markets within the remit, and those that target specific frontier areas, such as Emerging Europe, Middle East and North Africa (Mena) or Africa in general.

A search of the IMA sectors reveals approximately 12 funds that have a frontier, Mena or African focus specifically in their name. Of these 12 vehicles, the best performer in 2013 was the Charlemagne Magna New Frontiers vehicle, run by Stefan Böttcher and team, with a return of 32.02 per cent. At the opposite end of the spectrum, three funds posted a loss in 2013, according to FE Analytics, although only three funds produced a figure that outstripped the MSCI Frontier Markets index return of 23.56 per cent, two of which were Mena-focused funds.

Within the closed-end space a search of the AIC sectors reveals approximately seven vehicles with a frontier, Eastern European, or African mandate in the name, and no specific Mena- or Middle East-focused vehicles.

Perhaps the best known of these is the BlackRock Frontiers Investment Trust, managed by Sam Vecht, which delivered a return of 45.97 per cent in 2013, roughly 43 percentage points ahead of its nearest open-ended rival.

The upgrade of Qatar and the UAE is expected to thrust frontier markets into the limelight and, combined with the dismal returns of its emerging market cousins in recent months, this sector could see a spike in interest in the near future.

The only question is whether the continued turmoil in Ukraine, and the election season in many emerging and frontier markets in the rest of 2014, will derail performance or whether the uncorrelated appeal of these markets will withstand the additional pressures.

Nyree Stewart is features editor at Investment Adviser

Fund picks: Frontier markets

Franklin Mena fund

This $180m (£107m) fund, managed by Stephen Dover and Purav 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 16 of 35.3 per cent is more than 15 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, as at the end of February.

Baring Mena fund

Managed by Ghadir Abu Leil-Cooper, this $15.5m (£9.2m) fund is at the smaller end of the scale but its performance since launch has been consistently strong, ranking second in the peer group of 12 for the year to April 16, and topping the list for the three-year period with a return of 50.7 per cent. The largest geographical weighting is towards the UAE at approximately 20.3 per cent of the portfolio.

BlackRock Frontiers Investment Trust

Managed by Sam Vecht and Emily Fletcher, this £170.5m (£101m) investment trust has stood out among its peers. Since launch in December 2010 it has returned 18.8 per cent, ahead of the MSCI Frontier Markets index return of 17.9 per cent. 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 12.5 per cent of the portfolio.