Norges Bank Investment Management has benefited from the country’s vast oil wealth, tripling its assets under management (AUM) since the financial crisis to $888bn. To ensure that it can cope with the surge of inflows, it has announced that it will expand its mandate to invest more actively in both bonds and equities over the next years, which some experts believe could provide a boost for two markets in particular.
Managers of the fund will widen its mandate to include frontier markets for the first time and will more than double the number of large companies it has more than 5 per cent in – from 45 to 100.
With more than two thirds of its large holdings being in European companies, the change in strategy could potentially provide a for boost for investors in the continent, though Andrew Lister (pictured), senior investment manager at Advance Emerging Capital, thinks frontier markets will get the biggest boost.
Lister says the inflows will make more of a mark on the smaller frontier market universe, though says any boost is likely to be very gradual because of the pension fund’s huge size.
“It can only be a positive for frontier markets, but sovereign wealth funds tend to be quite slow when [making changes]. I would expect them to be investing across every asset class imaginable in frontier markets, though,” he said.
Lister says the news is more symbolic than anything else. He is very bullish in his outlook for frontier markets and says the move by Norges Bank Investment Management is just the beginning of greater interest from institutional investors and sovereign wealth funds in frontier markets.
“Investors of all sizes shapes and forms are waking up to the opportunities from frontier markets and realising it is an area they should be exposure to or many reasons – performance, growth, valuations and diversification,” he said.
Lister says frontier markets currently have a unique position among asset classes combining high growth potential and cheap valuations.
“You have a very diverse asset class that offers a lot of diversification benefits. There isn’t much correlation between developed markets and frontier markets as they are not so plugged into what is happening in the global economy and financial system – even compared to emerging markets. Vietnam doesn’t have much bearing on what happens in Argentina.”
“Frontier markets have high growth in GDP terms but also at a stock level where companies are supplying goods to an increasingly wealthy population of growing middle classes. Also, there are plenty of stocks that are looking incredibly cheap – particularly ahead of multi-year growth they have ahead of them.”
Frontier markets had a fantastic year in 2013 in contrast with more mainstream emerging markets. Data from FE Analytics shows the MSCI Frontier Markets index grew by 23.6 per cent while the equivalent emerging markets index fell 4.46 per cent.
Over the past two years frontier markets have outperformed both developed and emerging markets, with the MSCI Frontier Markets index up more than 53 per cent, beating the FTSE All Share, S&P 500, MSCI Emerging Markets and Topix indices.
Performance of indices over 2yrs
Source: FE Analytics
Lister says within frontier markets he particularly favours African countries, especially its financial sector, which has very small market penetration relative to its population of almost a billion.
“There is still a lot of value in Africa, particularly in financials which are looking very cheap considering the growth potential they have there. Energy stocks are also looking cheap after a torrid few years,” he said.
High-profile fund manager Mark Mobius, who heads up the Templeton Emerging Markets trust, recently told FE Trustnet that if could buy one fund on a 30-year time horizon it would be a Nigeria ETF.
Aside from a range of other ETFs including the iShares MSCI Frontiers 100 Index, investors can get exposure to the asset class via a small group of specialised funds and investment trusts, including the $2bn Templeton Frontier Markets fund and £176m BlackRock Frontiers Markets IT.
Lister also tips Eastern Europe and Central Asia as attractive areas.
“Anything in Eastern Europe is looking cheap since the financial crisis. In fact, any country bordering Russia is automatically on a huge discount and therefore provides quite a lot of value,” he said.
The news of Norway’s more active interest in equity markets follows the move by the Japanese Government Pensions Investment Fund (GPIF) to enact changes to its investment strategy which will favour equities over government debt.
GPIF is the largest pension fund in the world, with $1.3trn AUM.
A number of industry experts and investors recently told FE Trustnet that the move could mean Japan’s stock market could be set for a boom due to the shift into equities.
Psigma’s head of global equities, Tim Gregory, said Japanese equities could be set for a huge boost because of the move, and suspects it may have already mobilised many investors to purchase equities.
The introduction of ISAs in Japan and the UK’s own ISA-limit increase to £15,000-a-year have also been viewed as positives for their respective equity markets.
