Emerging markets have come under pressure in recent years and have even lagged their developed world counterparts over three and five, a big disappointment to investors hoping to profit from their high growth economies. Frontier markets, on the other hand, have outperformed in recent months and Hambidge (pictured) says this is set to continue, with a recent survey of fund managers suggesting his view is widely shared.
Data from FE Analytics shows that the MSCI Emerging Markets index has made just 5.36 per cent over the past three years, while the FTSE All Share has made 44.39 per cent.
The MSCI Frontier Markets index has made 24.02 per cent over the same time, although that is down largely to a surge over the past six months.
Performance of indices over 3yrs
Source: FE Analytics
Over six months, the frontier markets index has made 17.46 per cent while the FTSE All Share has made 10.17 per cent and the MSCI Emerging Markets index has lost 6.73 per cent.
After a period of such strong outperformance, investors may be wary of a reversal, but Hambidge says these good figures are set to continue.
"We have had real success with frontier markets, although they only make up 2.5 to 3 per cent of our fund [Premier Worldwide Growth]."
"But think what emerging markets have done this year: frontier markets are still very cheap."
"They came from an extraordinary low place, completely ignored in the emerging market rally, and weren’t helped by the Arab Spring and what happened in Egypt, but it’s ultimately a very cheap asset."
Hambidge’s positive view on the sector is echoed by the results of a survey of pension fund managers, conducted by Barings.
Barings asked 75 fund managers which markets they thought had the best prospects for growth over the next 10 years.
Frontier markets received 18 per cent of the votes, putting the market second only to emerging Asia in the rankings.
This represents a rise of 5 percentage points from the last survey, conducted in October 2012.
At that time, 60 per cent of managers said they expected emerging Asia to do best over the same timeframe, meaning that there has been a striking collapse in confidence in the region over recent months.
Survey of pension fund managers
| Which market do you think has the biggest potential for equity gains (gross) over the next 10 years? | Oct-12 | May-13 |
|---|---|---|
| Africa | 7% | 16% |
| Japan | 4% | 0% |
| Middle East | 2% | 2% |
| Emerging Europe/ Russia | 9% | 8% |
| Emerging Asia (China, Korea, Thailand) | 60% | 22% |
| Latin America | 7% | 16% |
| Frontier Markets | 13% | 18% |
| UK | 0% | 0% |
| US | 9% | 14% |
| Europe | 0% | 4% |
Source: Barings
Andrew Benton, head of UK and international sales at Barings said: "The growing interest in frontier markets is a trend that we believe is likely to grow. Barings believes frontier markets offer the potential for strong long-term growth in a low growth world."
"Low correlation with both emerging and developed markets, as well as low intra-country correlation, means that frontier markets also offer diversification benefits."
Data from FE Analytics shows that there has been a correlation of 0.77 between the MSCI Emerging Markets index and the FTSE All Share over the past three years, but the frontier markets index has a correlation of just 0.46 and 0.44 to the indices, respectively.
Low correlation helps to reduce the volatility in investors' portfolios, but this is likely to be of little comfort if the market is falling.
The turmoil of the Arab Spring has been a major worry holding back investors from taking the plunge into the sector.
Benton says that the outcome of the unrest should be a move towards democracy, which should hopefully provide more stable conditions for markets and that a similar trend is taking place elsewhere in Africa.
"Frontiers are markets at an early stage of development and as such they have traditionally carried higher governance risk," he said.
"However, Barings believes there has been a tangible change in policy mix across these countries: democratisation has a chance of taking root in the Middle East following the Arab Spring and there has been a general trend away from autocratic to democratic regimes in Africa."
Hambidge points out that there is much more to frontier markets than the Middle East, with economies in Africa and central Asia also offering opportunities.
The £103.1m BlackRock Frontiers Investment Trust, managed by Sam Vecht, is his route into the sector.
Data from FE Analytics shows the trust has done particularly well over the past six months, returning 32.23 per cent in total return terms while the index has made 17.46 per cent.
Performance of trust vs index and sector over 6 months
Source: FE Analytics
In NAV terms, the trust has also beaten the index, returning 121.9 per cent, and has moved on to a premium of 1.9 per cent.
With the trust seeing strong demand, the board has decided to issue C shares at 100p to 88.25 NAV, amounting to a 1.78 premium.
Winterflood analysts also rate the trust and note that the manager is aware of the hot streak frontier markets have been on and is reducing his weighting to Kenya and Nigeria on valuation grounds.
"Sam [Vecht] and his team are clearly very aware of the pitfalls of investing in these markets and their caution on valuations and political instability should mean they avoid the worst of any blow-ups," they said.
"The portfolio is distinctly different from its benchmark and so will not perform in line for much of the time."
"With shareholders allowed a full exit in less than three years, we believe that BlackRock Frontiers is an attractive alternative to mainstream emerging market funds."
The analysts also say that frontier markets offer an attractive asset class for investors who wish to diversify away from the disappointing results in emerging markets.
"Frontier markets have produced good returns and we believe that it remains an attractive asset class for long-term investors who are prepared to be patient and are mindful of the risks," they said.
