Introduction
Certainly last year and most of 2014, the asset class outperformed its emerging market counterparts, as emerging markets suffered on the back of a strengthening US dollar.
The MSCI Frontier Markets index has also been outperforming the S&P 500, the MSCI World and the FTSE 100 indices in the past year, although performance has lagged behind the S&P 500 in the last month as the falling oil price hit markets.
In the 12 months to November 25, the MSCI Frontier Markets index has returned 17.43 per cent to investors, against the S&P 500’s 19.51 per cent. However, it still beat the MSCI World index, which delivered 12.43 per cent, the FTSE 100’s 4.12 per cent and the MSCI Emerging Markets index which, to December 2, delivered 4.03 per cent.
Frontier markets are located in South America, the Middle East, Africa and Asia and are characterised as less developed than emerging market countries, with markets that are usually more difficult to access.
In May this year, the United Arab Emirates and Qatar were upgraded to emerging market status, having previously been classified as frontier markets. While the reclassification of the two countries has had little impact on the MSCI Emerging Markets index, the move was felt by the MSCI Frontier Markets index, as they accounted for more than 36 per cent of this index.
In spite of the current political unease in the Middle East, many investors have been wondering whether other Gulf countries will be upgraded to emerging market status.
Hedi Ben Mlouka, manager of the Duet Frontier fund, makes a point of identifying the themes in frontier markets ahead of investing in companies in the region.
He explains: “The themes that we’re talking about are medium- to long-term themes and they are unique to frontier markets.
“One of them is very well discovered and has to do with the rise of the middle-income consumer in frontier markets; the high urbanisation rates in these countries.”
“The second theme has to do with government spending,” he continues. “Government spending is very important in frontier markets because many of the countries we invest in are wealthy from a resource perspective – oil and gas.
“What we do is look for where that money is being spent and what are the priority sectors for the government.”
In spite of some recent turbulence in frontier markets, Mr Mlouka is positive about the region’s future.
“Frontier markets will remain attractive for the next five to 10 years,” he says.
But he cautions that “timing the markets is a generally difficult exercise. I believe you should invest in the themes I mentioned. These are themes that will play out for the next few years; they are not short-term themes; they are not cyclical by nature.
“If you venture into more cyclical sectors, like petrochemical and commodity-driven businesses in these countries, then really you are taking a view on global demand and global growth.”
THE PICKS
BlackRock Frontiers Investment Trust
This £188.8m investment trust offering from BlackRock aims to achieve long-term capital growth. Sam Vecht and Emily Fletcher co-manage the trust, which only launched in December 2010. Since then, it has clocked up an impressive performance, delivering 81.25 per cent in the three years to November 25, according to FE Analytics. The trust has 12.8 per cent of its assets in Kuwait, with 9.2 per cent exposed to Nigeria and 8.1 per cent to Pakistan. Among its top-10 holdings are Kuwait Food, Kazakhstan-based Halyk Bank and Maroc Telecom of Morocco.
Baring Asean Frontiers
Manager SooHai Lim invests in companies in Asia that he believes will benefit from the economic growth and development of the region. He seeks to achieve this by investing at least 70 per cent of its assets at any one time in equities of companies based in countries that are members of the Association of South-East Asian Nations, including Singapore, Thailand and the Philippines. The $592.8m (£376.4m) fund currently has 22.3 per cent in Indonesia, followed by 21.4 per cent in Thailand. It is one of the best performing frontier markets funds, delivering a return of 71.22 per cent in the five years to November 25.
EDITOR’S PICK
Templeton Frontier Markets
Veteran investor Mark Mobius is behind this $1.9bn (£1.2bn) fund that launched in 2008. He sets out to achieve long-term capital appreciation in the fund and has achieved consistent performance. In the five years to November 25, the fund returned 40 per cent to investors and over three years it has done even better, delivering 47.49 per cent. The fund factsheet shows it has exposure to a number of frontier markets, including Argentina, Pakistan, Sri Lanka and Egypt. Mr Mobius has years of experience investing in emerging markets and frontiers, so he may be considered a safe pair of hands by investors.
