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Fund Review: Frontier markets


Figures from FE Analytics reveal that in the year to September 16 the MSCI Frontier Markets index declined 18.9 per cent, placing it behind most other regional indices, including the MSCI Emerging Markets index.

However, taking a three-year view shows frontier markets is one of the better performing sectors, with the MSCI Frontier Markets index rising 31.7 per cent, just behind the 35 per cent gain by Japan’s Nikkei 225 index and the MSCI World index that rose 36.4 per cent over the same period. Unsurprisingly, the S&P 500 index posted the strongest gain over three years of 49 per cent.

In a recent note on frontier markets, Jupiter Asset Management’s Franklin Adatsi, a member of its global emerging markets team, considered whether the name was misleading.

“Frontier markets, by [the] very name, suggests a place on the edge of lawlessness, a Wild West where only the most intrepid investor would dare set foot,” he says.

But Mr Adatsi believes this reputation is “undeserved” and overshadows the market’s largely positive characteristics, such as strong economic growth prospects, healthy government balance sheets and high corporate payout rates.

“The risks conjured by the word ‘frontier’ can often mean investors are surprised by the strength of underlying fundamentals in these markets, especially by levels of corporate governance,” he points out. “In many frontier markets, retail investors own meaningful proportions of company shares. Retail investors have strong political clout.”

A look at the makeup of the MSCI Frontier Markets index reveals Kuwait is the largest weighting by country at 21.2 per cent, followed by Nigeria at 13.9 per cent, Argentina at 10.9 per cent, Pakistan at 9.6 per cent and Morocco at 7.2 per cent.

On Argentina, Tim Love, investment director at asset manager Gam, observes the country “outperformed the MSCI Emerging Markets Latin America index for the past three years, contrary to expectations”.

Argentina is due to hold a closely fought general election in October, which will decide who is to replace current president Cristina Fernández de Kirchner.

Political change in Nigeria earlier this year has also created opportunity in what is Africa’s largest economy, according to Mr Adatsi.

“The new administration’s commitment to good governance may represent a major catalyst that could provide confidence and stimulate long-term investment and accelerate the pace of economic growth,” he says.

Taking a more macroeconomic overview of frontier markets, SooHai Lim, who manages the Baring Asean Frontiers fund, acknowledges all eyes are on Federal Reserve chair Janet Yellen.

“One major uncertainty facing investors is the timing and pace of the US Fed hike,” he explains. “While a hike could create further near-term volatility for the sector and its currencies, it would remove a key overhang/uncertainty.”


Templeton Frontier Markets

This fund, which launched in October 2008, is run by veteran investor Mark Mobius and invests in firms across the market-cap spectrum in frontier markets. Its performance has suffered of late, with the fund returning 10.1 per cent over three years, behind the MSCI Frontier Markets index’s 31.7 per cent rise. By country, Vietnam and Saudi Arabia are the largest weightings in the portfolio at 11 per cent each, while Nigeria accounts for 10.7 per cent. The manager’s experience has been a draw for investors, with the fund currently $1.2bn (£772m) in size.

T Rowe Price Frontier Markets Equity

This $7.6m (£4.9m) fund has been run by Oliver Bell since June 2014, so it is still early days for the product. The manager’s objective is “to increase the value of its shares over the long term through growth in the value of its investments”. Financials comprise 50.1 per cent of the portfolio, with consumer staples accounting for 14.2 per cent. Performance has been lacklustre as frontier markets have struggled more recently during the global turmoil, with the fund recording a 13.3 per cent loss in the 12 months to September 16. Time will tell if the manager can outperform.


BlackRock Frontiers Investment Trust

Sam Vecht and Emily Fletcher co-run this £171m investment trust. Its portfolio has 12.3 per cent allocated to Bangladesh, 11.9 per cent in Pakistan and 10.7 per cent exposed to Kuwait. Financials are its biggest sector allocation at 37.5 per cent, followed by consumer staples that account for 15.3 per cent. FE Analytics shows the trust has returned a healthy 42.4 per cent over three years to September 16, against the 1 per cent average loss of its peer group, the AIC Global Emerging Markets sector.

In this special report