The MSCI Frontier Markets index protected better than its developed counterparts in the most recent market correction, as FE Trustnet pointed out in a previous article.
It has now surged ahead of both the FTSE All Share and S&P 500, picking up 23.29 per cent so far this year, according to data from FE Analytics.
It is also well ahead of the battered MSCI Emerging Markets index, which has lost 5.36 per cent.
Year-to-date performance of indices
Source: FE Analytics
Some experts are saying that frontier markets are poised to be what emerging markets were in the 1990s.
If these stellar returns were coming from any other sector, many investors would be thinking about taking profits and reinvesting them in underperforming ones.
However, Troue says they should be wary of frontier markets getting caught up in the turmoil in emerging markets.
"It’s a bit early to say if it’s the start of a bull market for frontier markets," he said. "There are still fears with quantitative easing in the US, and the emergence of frontier markets is still prone to volatility off the back of that, but the concerns are greater for emerging markets."
"But you could see capital flight if concerns ramp up," he warned.
"I think they have to be viewed as a very long-term investment and quite a small portion of a well-diversified portfolio," he said.
Troue points out that while frontier markets have clearly had a good run so far this year, they are still a high risk, speculative area for investors.
"There is huge long-term potential there. There are consumers that will come out of these areas as education and the standard of living improves," he said.
"But is now a good time to get in? It’s hard to say because they have had such a good run. Frontier markets are ideal for more regular savings and drip-feeding money in over a period of time because they are very volatile."
Troue says frontier funds are well suited for pensions – where investors can take a 10- to 20-year view and use regular savings to smooth out the returns over time.
With this in mind, he tips two funds investors may want to consider picking up, but he stresses they need to be prepared to hold on for a bumpy ride over the long-term.
BlackRock Frontiers IT
Sam Vecht’s £139.6m BlackRock Frontiers IT has had a strong run of late, picking up 42.31 per cent since the start of the year.
It has consistently beaten both the IT Global Emerging Markets Equities sector and MSCI Frontier Markets index since launch in December 2010, over which time it has made 13.92 per cent. The index made 5.68 per cent over this time while the sector lost nearly 4 per cent.
Performance of trust vs sector and index since launch
Source: FE Analytics
The trust is significantly more volatile than both the sector and index, with an annualised volatility score of 18.81 per cent over two years.
Troue says the trust is managed by a well-resourced team that takes a thorough approach to researching the companies in frontier markets, something he thinks is key for investing in this sector.
"The level of research is very in-depth," he said. "They are getting out there and getting under the bonnet of companies and markets."
"They build a wider picture of the economy and markets and then look for companies within that market and take a position there. They can also take short positions, which is another string to the bow."
Troue says that the trust’s recent outperformance has led to a significant narrowing of the discount. It is now trading on a slight premium of 1.8 per cent, which Troue says is something investors need to consider.
He adds that the small size of the trust could create liquidity issues for larger flows.
"It’s OK for individual retail investors buying in small amounts, but for anything big there won’t be a lot of liquidity there," he said.
BlackRock Frontiers has a dividend yield of 2.6 per cent and ongoing charges of 2.14 per cent, including a performance fee. It is geared at 5 per cent.
JM Finn Africa
Troue also likes FE Alpha Manager Anthony Eaton’s CF JM Finn Africa fund, which represents a more concentrated approach to frontier markets.
He says the manager is extremely bullish on the consumer story in Africa – something he expects to grow over the long-term.
"He’s invested more through western businesses and businesses listed in developed markets," he said.
Although the fund is focused solely on Africa, it is less volatile than the MSCI Frontier Markets index over the last year, with an annualised score of 9.48 per cent, according to FE Analytics.
This focus on the consumer growth story through developed listings means the companies in the portfolio are subject to more rigorous corporate governance and accounting rules, which makes them a safer way to access the region, according to Troue.
The highest sector weighting, making up nearly half the portfolio, is to financials.
Over the last year, the fund has picked up 6.35 per cent. It is benchmarked against LIBOR GBP 6m +3 per cent, which has made 3.71 per cent.
The fund requires a minimum investment of £1,000. Investors should keep in mind the high ongoing charges of the fund – a hefty 3.57 per cent.
Eaton also runs the CF JM Finn Global Opportunities fund, which has an emerging markets focus.
