Bell, manager of the $39.7m T Rowe Price Middle East and Africa Equity fund, says that in recent corrections, frontier markets have held up better than their more developed counterparts, offering investors diversification along with strong upside potential.
"[Frontier markets] are not falling nearly as much, so you’re getting outperformance on the downside and getting a lot of upside as well," he explained.
Year-to-date, the MSCI Frontier Markets index is up 23.11 per cent, compared with 14.77 per cent from the FTSE All Share and 26.62 per cent from the S&P 500 index.
The MSCI Emerging Markets index has lost 2.6 per cent in 2013.
Year-to-date performance of indices
Source: FE Analytics
From the height of the market this year on 22 May to the lowest point following its correction, on 24 June, MSCI Frontier Markets fell the least of all these indices, dropping 6.45 per cent.
This compares with losses of 7 per cent from the S&P 500, 11.27 per cent from the FTSE All Share and 17.23 per cent from MSCI Emerging Markets.
Bell adds that companies in the sector have some of the highest dividend payouts on offer, an attractive proposition for anyone looking to boost their income stream.
He says these yields are sustainable as long as share prices remain cheap; however, he thinks this will eventually change, as share prices are likely to go up.
"This level of dividend payout is very sustainable," he said. "What might change is share prices react like they should, because right now there are very cheap companies out there."
"That said, a lot of high-yielding companies are banks, which are well-capitalised and will continue to pay out a dividend. There’s no reason why they shouldn’t."
He adds that the majority of investors in Middle East and African countries, which make up a significant part of the MSCI Frontier Markets index, are of the retail variety, which means companies are often very keen to keep their dividend payout growing.
"This is a retail market, so dividends are key. If you disappoint the man on the street, the share price will get crushed immediately," he said.
However, this dividend-focused culture can also present problems for investors. Bell admits that some companies leverage themselves too highly to ensure they can continue to pay out dividends to shareholders and says this is something he looks out for before investing in a company.
While the ability of frontier markets to protect against the downside and pay out good dividends are welcome features, their strong growth potential over the long-term remains their key attraction.
Bell says one of the most overlooked areas of frontier markets is banks, particularly those in the Gulf Coast countries and parts of Africa.
"We’re very overweight banks, with the exception of South African banks," he said. "[Middle Eastern] banks are very cheap, well-capitalised and have owned up to their sins from the financial crisis."
He says that once people start moving past their aversion to frontier markets, they will be surprised at just how healthy the sector's banking sector is.
However, he acknowledges that there are still some growing pains in the region that give cause for concern.
Four key worries he highlights are: the geopolitical issues surrounding Iran and the underlying religious tensions between different factions of the Muslim faith; political uncertainty stemming from upcoming elections in Nigeria, South Africa, Zimbabwe and potentially Egypt; the looming question of a Chinese economic slowdown; and fears over the evaporation of global liquidity if the US moves to stem QE or the dollar rapidly gains value.
Despite these potential headwinds, Bell says frontier markets are "on the cusp of a massive transformation" and thinks investors willing to get in now could benefit from the type of growth emerging markets experienced in the 1990s.
"Like the emerging markets of the 1990s, you’re going to get booms and busts, but the key thing is to avoid the busts because you’re going to lose half your money because of the way currency is affected by busts," he said.
Bell says this is why it is extremely important to understand both the macro and underlying fundamentals of companies in frontier markets, which he believes make up "the last piece of the emerging markets puzzle".
He adds it is very important to spend time on the ground meeting with company managers.
"You don’t want the wool pulled over your eyes, and that’s not going to happen when you’re visiting companies," he said.
Bell says that liquidity in frontier markets is not as much of a concern as people think, because there has not been enough inflows yet to cause a bubble to inflate.
"These markets are correcting a lot less because there’s very little money that is short-term in these markets," he said.
The T Rowe Price Middle East and Africa Equity fund is not constrained to any benchmark, which Bell says allows it to access more niche areas that are not included in the MSCI Frontier Markets index.
Since Bell took the helm in October 2011, the portfolio has outpaced both the FCA Offshore Recognised Equity – MENA sector and the MSCI Frontier Markets index, returning 36.84 per cent.
The sector and index made 28.68 per cent and 26.54 per cent respectively in this time.
Performance of fund vs sector and index since Oct 2011
Source: FE Analytics
The fund requires a minimum investment of $2,500. The firm is in the process of rolling out the fund on UK platforms, with ongoing charges of 1.11 per cent.
