Introduction
While the MSCI Emerging Markets index has dropped 5.5 per cent in the five years to March 17 2016, the MSCI Frontier Markets index has posted a gain of 19.9 per cent, according to data from FE Analytics.
This may seem surprising with many considering frontier markets to be illiquid and difficult to invest in, but this disregard by investors could be part of the reason why these markets have fared so much better.
Kuwait and Nigeria are two of the biggest markets in the frontier universe, while Argentina’s recent political and economic turnaround makes it the second-largest country in the MSCI Frontiers index at 14.5 per cent, ahead of Nigeria’s 12.3 per cent.
This diversity of players highlights a key issue when investing in this asset class – it is not really an asset class.
| THE PICKS |
Advance Frontier Markets Managed by Andrew Lister and Bernard Moody, this £91m fund aims to provide shareholders with long-term capital growth by investing in the frontier markets of Africa, the Middle East, Eastern Europe, Asia and Latin America. Its largest country weighting is to Vietnam at 15.1 per cent of the portfolio, while Pakistan accounts for 13.5 per cent. Performance has been steady, with a five-year return of 20.8 per cent, while the three-year performance of 1.2 per cent places it ahead of a number of its peers. Templeton Frontier Markets Run by veteran manager Mark Mobius, this $783m (£544m) fund was launched in 2008 and aims to achieve long-term capital appreciation by investing in equity securities of companies incorporated and/or having their principal business activities in frontier markets countries. The fund has delivered a respectable five-year return of 6.5 per cent, but performance has lagged more recently with a one-year loss of 11.9 per cent. The largest country allocation is to Vietnam at 16.1 per cent of the portfolio, while Pakistan accounts for 8 per cent. These growing economies could provide a welcome boost to performance if the trend continues. EDITOR’S PICK Schroder ISF Frontier Markets Equity This $1.02bn Luxembourg-based Sicav was launched in December 2010 and has been managed by Allan Conway and Rami Sidani since launch. It aims to provide capital growth by investing in equity and equity-related securities of frontier markets companies. Its largest sector weighting is to financials at 59.7 per cent of the portfolio, while Kuwait is the largest country weighting at 18.3 per cent. For the five years to March 17 2016, the fund delivered a return of 43.7 per cent compared with the MSCI Frontier Markets index gain of 22.2 per cent. |
Dominic Bokor-Ingram, portfolio adviser at Charlemagne Capital, says: “There is no correlation between what goes on in Bangladesh and what goes on in, say, Argentina. These countries are driven by internal politics and reforms. Another reason we like frontiers is, due to the low level of correlation with the rest of the world, there is not much foreign money in these markets yet.”
He points out that with roughly 215 countries in the world, if 25 are classed as developed and another 25 are classed as emerging in terms of MSCI classification, then there are 165 countries that can, theoretically, be classified as frontier.
“Although UAE and Qatar left in mid-2014, since then Argentina has become an investable market again,” he says. “Pakistan has become investable due to a change in government and policies. Myanmar’s stockmarket is just opening up and Iran – post sanctions being lifted – is now an investment opportunity. Cuba will [likely] develop a stock market, Ethiopia and Angola are also talking about opening up.”
But Steven Bell, chief economist at BMO Global Asset Management, EMEA, warns investors need to be able to distinguish between commodity producers and importers.
“Emerging and frontier markets should not be viewed as a homogenous asset class. Countries in the [commodity importers] group should be emphasised; India is particularly appealing. The commodity exporters – Russia, Brazil, Venezuela – are downplayed until there is a clear and convincing sign that the oil supply/demand imbalance is being worked out.”
As with any sector there are clear winners and losers, but countries such as Pakistan and Argentina are performing better than the average.
The MSCI Argentina index has gained 103.6 per cent in the three years to March 17 2016, while the MSCI Pakistan index climbed 32.9 per cent compared with the 8.8 per cent rise in the MSCI Frontier Markets index.
Commenting on Argentina’s progress, Jan Dehn, head of research at Ashmore, notes: “Macroeconomic policy has started to shift meaningfully. [At the start of March] the Central Bank allowed interest rates to rise. This should facilitate a major shift away from monetary towards debt-financed fiscal stimulus.”
