InvestmentsSep 28 2015

Fund Review: Magna New Frontiers

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Dominic Bokor-Ingram, portfolio adviser for frontier markets at Charlemagne Capital, which manages the fund, notes one of the key reasons for investing in the sector is to take advantage of the “excess economic growth in early-stage markets”.

The vehicle is one of the smaller funds in the frontier markets universe, and its process focuses on finding company management that can take advantage of the sector’s growth through executing their business plans.

“Therefore, we are looking at domestic industries, banking, telecoms, consumer healthcare and anything that is geared into that excess economic growth,” Mr Bokor-Ingram says.

While the fund’s process has remained the same since launch, frontier markets have evolved with both the United Arab Emirates (UAE) and Qatar being upgraded to emerging market status in 2014. But the manager points out this “is exactly the process we’re trying to play”.

He adds: “Why do we invest in frontier markets? It is for them to become emerging markets.”

The fund can still have holdings in countries that are no longer frontier markets, he notes, with the UAE accounting for the largest geographical allocation in the portfolio at 19 per cent.

He explains: “The hope is that when they get upgraded they do very well and valuations become more stretched than other frontier markets. Our natural sell decision when things become too expensive takes us out of those markets and we then recycle it into other cheaper frontier markets.”

The risk-reward level of the fund is a moderately high five out of seven, while the ongoing charge for the G-share class is 2.67 per cent, the fund’s key investor information document shows.

Since launch the N-euro share class, rebased in sterling, has delivered 0.7 per cent to September 17, compared with the MSCI Frontier Markets index’s rise of 18.4 per cent, data from FE Analytics shows. The fund has performed much better across three years, returning 29.7 per cent against the MSCI Frontier Markets index’s gain of 31 per cent.

The manager notes that in the past 12 to 18 months the fund has benefited from its holdings in what he terms the “reformist markets”. These are countries with positive political momentum that have not suffered too much from the low price of oil, such as Vietnam, Pakistan and Egypt.

“The biggest change to the fund this year has been the addition of a significant position in Egypt,” Mr Bokor-Ingram says. “While Egypt is classified as an emerging market rather than frontier, it has all the characteristics of a frontier market. Following [its] political problems, a new reformist government came in and is putting in place all the things we like to see. Given the size of the population and the history of the institutions that exist, as well as the mentality of the population in terms of entrepreneurship, we think this is one of the most exciting frontier markets.”

Meanwhile, Pakistan has also seen a turnaround in recent years following the first peaceful transition of power in 2013 to a reformist government. The manager says: “A new government came in and said all the right things – privatise, sell the mobile spectrum, fight corruption, fight the terrorist threat, and so on – and one by one it’s done all those things. It has taken that market from being uninvestable to one of the most exciting markets out there.”

On the flip side, the biggest detractor from performance has been the fund’s holdings in Georgia. Mr Bokor-Ingram notes that while the vehicle invests in some high-quality companies with strong results, and there is a reformist government in place, the country has suffered from its close proximity to Russia, as well as a currency devaluation.

He says: “It is an example of where the micro has remained good, but the macro top-down story has detracted somewhat. If you look at the past three or four quarters of both the Georgian banks we hold, the results have been very good and have outperformed expectations, but it hasn’t stopped people from a top-down perspective trying to avoid Georgia.”

EXPERT VIEW

Ben Willis, head of research and investment manager, Whitechurch Securities

This fund is right out there in terms of equity investing. It aims to tap into the burgeoning world economies within, for example, eastern Europe, Africa and South America as defined by the MSCI Frontier Markets index. Naturally, the potential wealth growth of these companies is a long-term story and the portfolio should be viewed as such for those who can stomach the risk. This is a fund that you put away, lock in the drawer and revisit many years down the line.