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Frontier markets' correlation benefits under threat, warns Premier’s Evan Cook

27 March 2014

Simon Evan-Cook says because the countries in the sector are too small to be noticed by most investors, they are not currently subject to huge shifts in sentiment – but this will soon change.

By Jenna Voigt,

Features Editor, FE Trustnet

Frontier markets diversification benefits are under threat from the growing popularity of ETFs tracking the idices, according to Simon Evan-Cook, senior investment manager on Premier’s multi-asset team.

The region displays a lower correlation to the developed world indices than they do to each other, according to FE data. Over three years the correlation to the FTSE is 0.53, to the MSCI Europe 0.5, while to the S&P500 it is a higher 0.71. The correlation to emerging markets is even lower, but this is down to the emerging markets having a torrid year last year while frontier markets rallied.

ALT_TAG Evan-Cook (pictured), says the reason the region has been so loosely correlated to developed and emerging markets is because the countries in the region were too small to fall on most investors’ radar, which meant they weren’t subject to huge sentiment shifts which could send the market tanking – as we’ve seen recently with emerging markets.

“[Frontier markets] march to their own tune,” he said. “When we first bought into frontier markets, there were no ETFs, so there weren’t big institutional flows coming in and out,” he said.

“Frontier markets are more affected by what domestic investors are doing, and they are much less correlated for this reason.”

But the manager says there are now a couple of ETFs – such as the iShares MSCI Frontier 100 Index fund – which Evan-Cook says is bad news for the asset class.

“It’s something we’re monitoring carefully. It’s bad news in our eyes that there are ETFs now because it does mean the correlation will increase,” he said.

“Frontier markets cant’ have a year like they had last year and stay under the radar.”

Frontier markets have traditionally been viewed as a volatile asset class and as a result, many investors have steered clear. But in the market sell-off of last year they held up well.

In the market correction last summer, emerging markets bore the brunt of the sell-off, shedding more than 17 per cent from the peak of the market on 22 May to the end of June. Frontier markets, by contrast, fell just 6.52 per cent, less than even the developed markets of the US, UK and Europe.

In July last year, T Rowe Price’s Oliver Bell told FE Trustnet that frontier markets were capable of protecting better on the downside than both developed and emerging markets, something he’s been proven right on over the last 12 months.

Frontier markets have continued to diverge widely from their emerging market counterparts over the last year. The MSCI Emerging Markets index is down nearly as much as the MSCI Frontier Markets index is up, indicating the region’s fortunes have shifted away from each other.

Over the last 12 months, the frontier markets index has gained 12.72 per cent while the emerging markets index lost 10.97 per cent, according to FE Analytics.


Performance of indices over 1yr

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Source: FE Analytics

Perhaps surprisingly, over the last year frontier markets have outpaced the rallying S&P 500 index, the MSCI Europe index and the FTSE All Share.

While Evan-Cook and his team are keeping an eye on flows into frontier markets, they still think valuations are attractive and the domestically-focused countries offer interesting opportunities that are difficult to find in the rest of the world.

Evan-Cook says the multi-asset team at Premier gain access to emerging markets through the BlackRock Frontiers investment trust, which he says is one way to protect against the growing investor interest in frontier markets.

“I’m dubious about whether you should be holding an open-ended fund in this area because when liquidity dries up and when people want their money back that can cause problems in open-ended funds,” he said. ALT_TAG

Premier have held the four FE Crown rated trust since launch in December 2010. Evan-Cook said early on was a tough time to hold the trust because it was battered by the turmoil of the Arab Spring, but since it has performed extremely well.

Headed up by emerging and frontier markets expert Sam Vecht (pictured), BlackRock Frontiers had a stellar year in 2013, picking up 45.97 per cent, nearly doubling the returns of its benchmark, the MSCI Frontier Markets index. Evan-Cook says the trust was the best holding in their growth portfolios.

Since launch, the trust is up 19.28 per cent while the index gained 11.57 per cent, according to FE Analytics.

Performance of trust vs index since launch

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Source: FE Analytics

BlackRock Frontiers is yielding 3 per cent.

The trust is trading on a premium of 3 per cent and has ongoing charges of 2.83 per cent, including a performance fee.


Vecht recently told FE Trustnet that the frontier markets rally had further to run because, unlike the developed world, the 2013 rally was a result of strong earnings growth rather than multiples expansion.

The trust is heavily exposed to the Middle East and Africa, with more than 50 per cent of the portfolio invested in the region. Asia Pacific stocks make up the second largest holding within frontier markets, at 17.9 per cent.

Financials and basic materials are the largest sector weightings, at roughly 25 per cent each.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.