Frontier funds face assets overhaul

Frontier market managers are facing up to an overhaul of their index, which could force them to radically change the holdings in their funds.

On June 2, Gulf countries Qatar and the United Arab Emirates (UAE), which together take up 36.3 per cent of the MSCI Frontier Markets index, will be promoted to the MSCI Emerging Markets index.

And frontier markets managers have begun to sell down their holdings in the two countries in order to comply with fund restrictions.

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Ewan Thompson, manager of the Neptune Frontier Emerging Markets fund, said he would have to halve his positions in Qatar and the UAE in the coming weeks because of the index changes.

The Neptune fund is only allowed 20 per cent of its assets in ‘off-benchmark’ positions, but it already has 10 per cent in positions that are not part of its index.

The fund’s latest factsheet said the vehicle had 26.8 per cent of its assets in Qatar and UAE at the end of March this year.

Mr Thompson said exposure to the two countries was now slightly lower, but added he would have to sell a significant chunk of assets to comply with the fund’s rules.

The manager said he would still “at the very least need to halve the positions in Qatar and the UAE”, which would mean selling off more than 10 per cent of the fund’s assets.

He said the fund’s rules still gave him a “reasonable amount of leeway” on the June 2 deadline, but said he would “be reducing and getting out around that time”, reallocating to other countries.

Dominic Bokor-Ingram, co-portfolio advisor on the Charlemagne Magna New Frontiers fund, said the product’s flexibility meant the managers would not be forced into making any changes.

However, he and lead adviser Stefan Böttcher have been reducing the fund’s positions in the UAE and Qatar anyway, because he said the rally in both markets had made them look expensive.

Mr Bokor-Ingram said domestic investors had been buying up the market, in anticipation of a further rally when global emerging markets managers and exchange-traded funds start buying into the countries when they are promoted.

The MSCI Qatar index has risen 43 per cent in the past year, while the FTSE UAE index has risen 79 per cent.

But the UAE index has fallen by nearly 10 per cent in the past week. Mr Bokor-Ingram suggested this might be because investors realised that emerging markets managers may shun the two countries because they have been bid up to excessive levels.

While the removal of the UAE and Qatar makes a huge difference to the MSCI index, most frontier funds have flexible mandates that allow them to take significant off-benchmark positions if necessary or define what constitutes a ‘frontier market’ themselves, which is what the Templeton Frontier Markets fund does.