The €18m (£14m) Magna New Frontiers fund managed by Charlemagne Capital aims to make money as a minority shareholder out of a portfolio of listed frontier market equities.
Managed by Stefan Böttcher and team, the fund looks for countries that are going through reform processes, which normally generate excess economic growth, and then searches for companies with strong management teams in a good corporate governance structure.
Dominic Bokor-Ingram, portfolio adviser at Charlemagne Capital, explains: “We meet company management and identify the opportunities from a macro and from a sector perspective, and whether we can find management that can execute on that opportunity.”
While the investment process has remained the same since the inception of the fund, Mr Bokor-Ingram notes “the markets we’re interested in have changed”.
In addition, he acknowledges that while frontier markets are diverse with their own individual drivers, global macroeconomic factors can play a part. He explains: “Within the frontier universe you have quite a few resource exporters; clearly two of the biggest countries in the frontier index are Kuwait and Nigeria and they depend heavily on oil. So yes, macro factors do play a part, but less of a part outside commodities because there isn’t the amount of foreign money in the markets. There is a lower correlation to global markets but frontier markets are not completely immune.”
Aside from the excess economic growth and low levels of correlation, another attraction is the fact the area is under-researched. “We have a bottom-up fundamental investment process, it involves meeting management of all the companies we invest in, it involves building financial models of the companies, forecasting three years out and coming up with a target price,” he says.
“Because there is a very low level of foreign money in these markets, they are generally not extensively researched in a fundamental way so it means you can find much bigger mispricing.”
The fund’s remit means its G share class sits at a risk reward level of five out of seven, while the key investor information document records an ongoing charge of 2.52 per cent plus a performance fee of 20 per cent of the return in excess of the percentage return on the MSCI Frontier Markets Free Net Total Return index in euros.
For the five years to March 17 2016 the fund has delivered a 15.7 per cent return compared with the MSCI Frontier Markets index gain of 19.9 per cent, according to data from FE Analytics. The fund’s three-year return of 25.3 per cent, however, is more than double the 11 per cent gain in the MSCI Frontier Markets index.
EXPERT VIEW - Lena Tsymbaluk, manager research analyst, Morningstar |
We have high regard for Charlemagne and its undiluted commitment to emerging and frontier markets. The fund benefits from an experienced duo of Stefan Böttcher and Dominic Bokor-Ingram and a dozen emerging markets analysts who are encouraged to recommend their highest conviction stocks, the performance of which is incorporated into their remuneration. The managers follow Charlemagne’s house style and the emphasis on growth and quality is evident in the portfolio’s higher-than-market earnings growth and return on equity. |
Mr Bokor-Ingram notes the outperformance of the fund is “pretty much all on the basis of stockpicking”. He adds: “You can find the best country or the best opportunity but if you don’t have the management team that can execute – emerging markets is all about execution – then you won’t make money. It is down to stockpicking, not a top-down macro view on individual markets.”
Recent changes in the portfolio have included selling out of Nigeria in March 2015 and also moving the 13 per cent allocation to Saudi Arabia down to zero over the past four months.
“We had high expectations in Saudi of the market opening up to foreigners, and this has only happened to a partial extent. We also had higher hopes for the reform process – Saudi recognised it needed to reform the economy because it was too reliant on oil, but it never really committed.”
Instead, the team has increased the portfolio’s allocations to Vietnam, Pakistan and Argentina.
In Vietnam, Mr Bokor-Ingram explains reforms started in the country a few years ago, including reforming state-owned enterprises, have helped boost the economy, so it is now growing at nearly 7 per cent, leading the team to increase its position to roughly 17 per cent of the fund. “We see it as the best-performing economy and best-performing reform process in Asia now,” he adds.
Argentina has also had a reversal of fortune under new president Mauricio Macri who, according to Mr Bokor-Ingram, has done “all the things he should have”, in terms of relaxing currency restrictions and bringing down inflation. He adds: “The economy has a chance to start growing. So in Argentina we’ve taken [it] to a 10 per cent position in the portfolio in the past few months.”
