The objective of the £117.7m Advance Frontier Markets Fund investment trust is long-term capital growth through investment in frontier markets.
Although manager Andrew Lister notes the team’s definition of frontier markets is “all those markets that fall below emerging markets”. This provides the trust with a universe of roughly 50 markets, half of which the manager describes as “really quite marginal, quite small, quite illiquid and don’t satisfy the indices liquidity criteria”, such as Ghana, Botswana, Zambia, Zimbabwe, Sri Lanka and Mongolia.
Mr Lister says: “It is a very broad universe and we have a pretty flexible mandate, which is intentional as we think some of the best opportunities will be in those smaller, up-and-coming markets that are off the radars of more mainstream investors.”
The investment approach consists of investing in third-party funds and closed-ended funds in frontier markets, which the manager suggests is a logical approach to investing in such a diverse opportunity set. He notes: “These are very different markets, with language barriers, different accounting treatments and different conventions on corporate governance and corporate management. If you’re locally based, you’ll see the efficiencies that will allow you to generate attractive returns from stock picking more than you would do if you took a blanket approach to those markets. If you’re going to do that, you have to apply a pretty ruthless liquidity screen and you’ll only end up buying the more liquid companies in frontier markets, which we think gives you less scope for active returns.”
Macro remains an important factor in frontier markets, however, with Mr Lister noting investors need a reasonable understanding of political risk. As a way to limit the country-specific risk this can entail, there is a 15 per cent country limit for the portfolio. “Having more than 15 per cent in any one frontier market would seem quite aggressive, particularly as you don’t know what’s lurking around the corner,” he says.
In the five years to November 25, the trust has delivered a total return of 55.76 per cent, according to FE Analytics data, only just falling behind the MSCI Frontier Markets index return of 57.56 per cent. For the year to date it is also slightly lagging the index, with a return of 12.58 per cent against the index return of 17.35 per cent.
Mr Lister points out that while the portfolio pays little attention to frontier indices, one of the reasons the fund has lagged the index is the changes around Qatar and the United Arab Emirates (UAE), which had accounted for roughly 35 per cent of the frontier index.
“Prior to their promotion, Qatar and the UAE had very strong performance – the UAE was up more than 100 per cent in the year prior to promotion. But we were underweight both those markets as we don’t think it’s sensible to be that concentrated,” he explains.
Instead, the team has been adding to Africa and also to eastern Europe “in a small way”, as Mr Lister acknowledges the region has some of the bigger macro challenges to overcome.
“Our biggest allocations are to Saudi Arabia, Nigeria, Vietnam and Romania, and that collection makes up close to 50 per cent of the portfolio. Things that have worked well have been Vietnam and Argentina, which is a market that has surprised, and Kenya has also been doing well.” The manager points out that Argentina is a market where the perception does not perhaps match the reality, particularly with an election next year in which incumbent president Cristina Fernández de Kirchner is unlikely to be re-elected.
He notes: “Assets are incredibly cheap and have performed incredibly well, and there is still a very healthy level of interest in [Argentina] because of these anticipated changes. It is frontier in name, but it’s a pretty middle-class economy and is the second-largest economy in Latin America. It has got an awful lot to offer, including soft commodities and energy. [Argentina] has some incredibly well-managed companies, which again you wouldn’t necessarily think.
“It is one we like and we have been able to exploit that gap between perception and reality as we’ve been able to buy things quite cheaply.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
At a glance, the fund is about a third exposed to Africa, a quarter to a third in the Middle East, with 20 per cent in Asia and a smaller Latin America and eastern Europe exposure. As a listed trust, it may run at a premium or discount to net asset value and at the end of the last quarter the fund’s discount was 17.5 per cent. Advance proposes that pricing anomalies exist in emerging markets and frontier markets more readily than in developed markets and hence are suited to an active approach based locally. It achieves this ostensibly within a fund of funds structure, which can add unexpected costs. The liquidity of its structure is far from straightforward and will need time to unravel, so it is not a first choice for a retail investor.
