Frontier funds for your portfolio
The launch of industry stalwart Dr Mark Mobius’ Templeton Africa fund is causing many investors to review their exposure to some of the world’s least developed regions.
By Mark Smith, Reporter, FE Trustnet
Tuesday April 24, 2012
Growth in the world’s traditional emerging markets such as Brazil, Russia, India and China has levelled off as the economies become more correlated to the developed world and each nation has faced problems of its own, such as the well documented slowdown in the Chinese economy.
In addition, frontier markets in Africa, the Middle East, the Americas and eastern Europe are fast becoming more sophisticated and efficient. Improvements in corporate governance and investment from the likes of China have boosted growth in the sector over the last 12 months.
While funds focused on frontier markets are among the most volatile available, people with an investment horizon of more than 10 or 15 years may wish to consider these high-growth portfolios.
Templeton Frontier Markets
Dr Mark Mobius’
newly launched Templeton Africa fund looks poised to benefit from changing demographics and rising demand for natural resources. However, the majority of investors are unlikely to want to commit to the region and are likely to favour Mobius’ already established £929m Templeton Frontier Markets portfolio.
The fund offers a more diversified range of stocks split across a wider selection of frontier market economies from around the world. This should help to dilute political risk, one of the most important considerations for this investment type, demonstrated most recently by the unrest in the Middle East.
Our data shows that since the fund was launched in October 2008, it has returned 68.12 per cent versus a loss of 15.14 per cent from its MSCI Frontier Markets benchmark.
A significant concern with this type of investment is the problem of liquidity. However, Mobius is happy to invest in companies operating in frontier markets through more established companies traded on mainstream stock exchanges.
Source: FE Analytics
JPM Africa Equity
With returns of 74.54 per cent, this $377m fund has delivered more than any other frontier markets portfolio over the last three years.
Managers Sonal Tanna
and Oleg Biryulyov
are looking to benefit from substantial investment in the region from both developed and emerging markets as well as fundamental growth from favourable demographics and economic development.
"Developed market companies continue to show confidence in sub-Saharan Africa by investing capital on the ground," said the managers in a recent note to unit holders. "This is not necessarily captured in foreign direct investment flows, but is often demonstrated through long-term investment from multinational companies, such as Nestle in Nigeria and Diageo in Kenya."
Investing in a specialist strategy such as this may bring substantial upsides versus a more diversified – and therefore diluted – strategy. However, the managers acknowledge that more focused funds are likely to be more volatile.
"Whilst the growth potential of African equities makes this fund very attractive for investors looking for high returns, investors in this fund need to be comfortable with the additional political and economic risks associated with African market investments."
"This fund may, therefore, be suitable for investors who already have a globally diversified portfolio and now want to expand into riskier assets in order to potentially boost returns."
Source: FE Analytics
BlackRock Frontiers Investment Trust
In the closed-ended space the £77m BlackRock Frontiers Investment Trust is one of the only frontier-focused portfolios available to investors. The fund is headed-up by Sam Vecht
who also fronts the BlackRock Greater Europe IT and BlackRock Eastern European Trust
The Frontiers Investment Trust is invested principally in the Middle East and north Africa. Qatar, Saudi Arabia, Nigeria, Kazakhstan and the United Arab Emirates account for nearly half of total assets under management but the fund also invests in South America and eastern Europe, and has a 3.4 per cent weighting to Iraq, a region that benefits from oil proliferation.
"Iraqi stocks rose strongly as speculation surrounding the intentions of large western oil companies increased," said Vecht in a recent note to shareholders.
"The prospect of an oil law and an environment conducive to exploration investment is driving interest in what is one of the world’s last major under-explored onshore oil regions."
Our data shows that the investment trust has lost 14.77 per cent over the last 12 months, with the manager insisting that investors are yet to recognise the underlying value of some of his highest-conviction stocks.
"Detracting from performance were holdings in Ukrainian energy stock JKX, which remained unloved by investors despite the significant oil price rally, and Argentinean energy stock YPF, which fell despite reporting the discovery of one of the largest shale oil fields in the world, with a potential resource of 26 billion barrels, after relations between the company and the government deteriorated," he said.
Source: FE Analytics