InvestmentsDec 8 2014

Fund Review: Ashmore Emerging Markets Frontier Equity

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Launched in July 2012, this Luxembourg-domiciled, $28.3m (£18m) fund aims to invest at least 80 per cent of its strategy in frontier markets.

The fund is benchmarked against the MSCI Frontier Markets index; however, Julie Dickson, portfolio manager on the fund, notes the team’s definition of frontier is “fairly broad” compared with the index.

She explains: “It is a very poorly covered, not well-understood, not well-researched area of the market. Our definition includes all the countries in the MSCI Frontier Markets index, plus 12 of the smallest markets within the MSCI Emerging Markets index. That includes Qatar, the United Arab Emirates [UAE], Egypt, Colombia and the Philippines and any market that is not included in either developed or emerging indices, such as Ghana and Saudi Arabia.”

The fund’s universe includes about 80 markets, but Ms Dickson points out this doesn’t necessarily mean the team invests in all of them, as that process is partly driven by liquidity and also opportunities based on valuations and growth potential. Ashmore takes a team approach to running the strategy, with the core team based in the US and local teams in the Middle East, Indonesia and India providing research ideas and local knowledge. The fund’s key investor information document suggests a five out of seven risk-reward profile, while ongoing charges sit at 2.6 per cent.

The investment process is focused on bottom-up stock picking. She explains: “We look across country and sectors in the universe, but we don’t really take a macro approach to how we invest. We are constantly screening and scratching across our database of companies. We [as a firm] have been investing in Africa for 20 years and in the Middle East for 10 years, so investment and research spans multi-decades of investment.

“It is very much a stock-selection exercise and exposure is dominated by the investment opportunities we see. The biggest risks you face as a frontier market investor is liquidity, and that will clearly drive some of the exposures we have based on how much of a position we can take.”

Since launch the fund has delivered an impressive 69.82 per cent to November 24 2014, outperforming the MSCI Frontier Markets index return of 52.14 per cent, according to FE Analytics. For the year to date, however, the fund is slightly lagging the index with a return of 16.85 per cent against the 17.75 per cent generated by the benchmark.

Ms Dickson points out 2014 has been challenging in frontier markets, particularly in view of large index moves, such as the promotion of Qatar and UAE to emerging market status.

She explains: “We still maintain them as part of our frontier universe, but the markets had a spectacular run over the 12-month period. As a result, some valuations got quite stretched, and as markets rallied we reduced our exposure somewhat. We still have exposure but not as much as eight to 12 months ago.” In addition, she notes the index changes meant Kuwait and Nigeria attracted more attention as they became the biggest markets in the frontier index.

“As exchange-traded funds and [index trackers] began trading around those index changes there was quite a lot of market dislocation,” she says. “Kuwait is 30 per cent of the index and it is one of the biggest underweights we have. The exposure we have is [mainly] a combination of traditional core frontier market exposure, but also opportunities across the smaller emerging markets, which have very strong fundamentals, very strong business cycles and valuations are relatively much more attractive compared with neighbouring peers.”

Another headwind for the fund has been its exposure to Saudi Arabia, which does not sit in any frontier or emerging market index. While markets were rallying following the index changes, the country was not a part of that move. But Ms Dickson adds: “The market to watch will be Saudi Arabia. It is opening up to foreign investments – likely in the first or second half of next year – which will be pivotal not only for the market itself but for the region as a whole. Saudi Arabia is bigger than Russia and South Africa and it’s more liquid than those two markets. If flows come into the region as it opens up, there will be flows across the board, which is always good for frontier market investing.”

EXPERT VIEW

Jon Beckett, UK research lead, Association of Professional Fund Investors

The fund’s recent turnover is notably high at almost 150 per cent, with around 50 stocks. Almost a third of the fund is held in the Middle East, but that’s below average compared with some other frontier funds. The rest of the portfolio is diversified across Latin America, Asia, Africa and Eastern Europe. The top-10 holdings also reveal that the fund manager will hold exchange-traded funds (ETFs), as in the case of the Market Vectors Vietnam ETF. This fund also takes forward currency positions back to the core portfolio’s US dollar position, which should become more prudent if and when the dollar hardens against non-dollar positions. Some of the basket feels more suited to the institutional buyer, rather than a retail one.