Gain from an early start in frontier markets

9 January 2018

Frontier markets, such as Argentina and Vietnam, are tipped to be the next strong investment story – much as emerging markets were 30 years ago – but they come with big risks.

If you have a higher attitude to risk and an appreciation of the long-term growth story of the emerging markets such as China and India, you may also be drawn to frontier markets. These smaller emerging areas at an early stage of development include Argentina and Vietnam and have huge potential for growth that is very appealing to investors.

Patrick Connolly, a certified financial planner with Chase de Vere, explains why frontier markets are a magnet for those searching out the next big investment idea. “They are home to 26% of the world’s population, have attractive demographics, rising employment and consumption, and an abundance of natural resources,” he says.

Many companies in frontier markets are also under-researched and this provides excellent investment opportunities for fund managers with the requisite resources.

Andrew Brudenell, manager of the Ashmore Emerging Markets Frontier Equity fund, says: “They’re what the emerging markets looked like 30 years ago. It’s basically the same story – you’re just getting in at an earlier stage of the process.”

His fund’s returns have come from a diverse range of markets including Argentina, Bangladesh, Georgia, Pakistan, the UAE and Ukraine. The most lucrative industry sectors, meanwhile, have been banking, the cement industry, healthcare, mobile, finance and agriculture.

The key to success is investing in countries that are going through a positive reform cycle, according to Dominic Bokor-Ingram, co-manager of the Charlemagne Magna New Frontiers fund. “The political will and support to follow through on reforms always creates economic growth and opportunity,” he says.

For example, Vietnam has started to remove restrictions on foreign ownership of companies in some industries, making the country more appealing to investors.

“The way to attract equity investment is to make it easy for foreign and local institutions to invest in the local market,” he explains.

On a company level, he believes the best way to make returns is by investing in domestic growth, which often means investing in companies that focus on consumers.

A prime example is NMC Healthcare, an Abu Dhabi-based healthcare provider. “It’s a company that builds, operates and equips hospitals in the Middle East, particularly UAE,” explains Mr Bokor-Ingram. It has been held by the fund for five years, and was promoted to the FTSE 100 index on the London Stock Exchange in September 2017.

As well as a clear ‘top-down’ investment story – this is where the investor looks at the overall economic outlook and chooses sectors – with healthcare being a priority spend for people when they hit middle income, it’s also a well-run business.

“It’s proven it can operate in a way that maximises the share price and returns to shareholders,” he adds.

Oliver Bell, manager of the T. Rowe Frontier Markets Equity fund, has witnessed material improvements across many frontier economies in recent years. Their political backdrops have stabilised, market-friendly reform agendas have been introduced, and there have been high levels of foreign direct investment.

At present, his fund’s largest country exposure is in Argentina. “President Macri has successfully renewed investor interest by laying out a transparent roadmap for fiscal policy – and economic activity is recovering,” he says.

He also likes Vietnam. “It is growing exports to levels consistent with many developed countries and has a young, highly productive middle class emerging,” he explains. “Sri Lanka is also relatively overlooked, with cheap valuations.”

Should you invest in the frontiers?

Mr Connolly insists that frontier markets come with a health warning, which means they’re only suitable for those willing – and able – to embrace a high degree of investment risk.

“There are significant social and political dangers, a severe lack of infrastructure, and poor corporate governance, meaning you might not be able to trust the accounts,” he says. It all adds up to a potentially volatile ride.

“There is scope to make both significant gains or large losses over very short time periods,” he adds.

Juliet Schooling Latter, research director at Chelsea Financial Services, agrees frontier markets are interesting, but also punchy and not for everyone.

“A small allocation to these markets may benefit investors with larger pots of money who want to add higher risk at the edges for potentially higher returns,” she says.

In return, they will get exposure to some positive trends. “For example, a significant amount of manufacturing is being moved to Vietnam instead of China as wages are lower,” she says.

It is also an investment for the very long term. While no investment is a guaranteed route to riches, this is particularly the case for the more unpredictable, emerging parts of the world.

“Most retail investors are probably better off sticking to emerging markets funds that can also invest in frontier markets,” she adds.

For this, you’ll need to do some research. Establish which frontier markets you believe to be the most interesting and fi nd out which investment funds have this exposure.

For exposure to frontier areas, Ms Schooling Latter highlights the Charlemagne Magna New Frontiers, RWC Emerging Markets and T. Rowe Price Frontier Markets Equity funds.

One to watch: Charlemagne Magna New Frontiers Fund

Where to buy it: The fund is available via DIY investment platforms and independent financial advisers.

This fund aims to grow investors’ money rather than produce income. It focuses on quality companies with strong management teams, sustainable growth prospects, and attractive valuations.

The managers have a bottom-up approach to investing, which means they focus attention on specific companies rather than on an industry or an economy. They spend a lot of time in meetings with company executives to discover overlooked opportunities.

Stefan Böttcher and Dominic Bokor-Ingram, who manage the portfolio, prefer to put their money into companies that they think have decent long-term prospects.

“Belief in the sustainability of their growth and evidence of good shareholder relations are key drivers for us,” they state.

The fund, which aims to perform better than its benchmark, the MSCI Frontier Markets Index, has between 40 and 70 holdings.

Argentina, the UAE and Vietnam are among its most significant country exposures, each of which accounts for around 15% of assets under management.

Other areas – accounting for less than a 10% share of assets each – include Romania, Kuwait, Poland, Pakistan, Georgia and Saudi Arabia.

As far as sectors are concerned, financials has the largest share with 31%, followed by the 12% in consumer discretionary names and 10% in energy.

There is also exposure to materials, industrials, consumer staples, healthcare, information technology, utilities, real estate and telecommunication services. 

About the fund: Charlemagne Magna New Frontiers Fund

Managers:  Stefan Böttcher (left) and Dominic Bokor-Ingram (right)
Launch date:  16 March 2011
Size of fund:  €471 million
Minimum initial investment:  €5,000
Minimum top-up investment: €100 Initial charge: Up to 5%
Ongoing charge: 1%
Performance fee: 20% of outperformance over the benchmark – MSCI Frontier Markets Index.
Contact details:

QUICK GUIDE: Consider investing in this area if…

  • You have a higher risk approach to investing
  • You are investing for the long term
  • You want exposure to developing areas of the world

Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express.

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