Franklin Templeton has announced plans to reopen its $868m Templeton Frontier Markets fund to new investors four years after soft-closing the strategy as managers Mark Mobius and Carlos Hardenberg set out the case for the niche asset class. 
The five FE Crown-rated fund aims to achieve long-term capital appreciation through investment in companies listed or operating mainly in frontier markets.
Veteran emerging markets investor Mobius says there are a number of reasons to invest in frontier markets, noting robust economic growth, continued macro development, deep discounts and lower correlation to other markets.
Indeed, Mobius says all of the Economist Intelligence Unit’s 10 fastest growing economies are emerging market countries and eight are in the frontier space.
The fund manager says demographic conditions in frontier economies support stronger economic growth, highlighting a younger workforce.
The impact of urbanisation is also likely to drive growth in the future with many economies still at low urban population levels.
Performance of S&P GSCI over 10yrs
Source: FE Analytics
Mobius said there are also signs of GDP per capita strengthening over the past 10 years, supporting growth of the broader economies.
The strengthening frontier market economies should present further opportunities for investment, Mobius and Hardenberg argue.
“The US, Europe and developed world are making a major move towards trade restrictions, which is really kind of a backwards market development,” said Hardenberg, noting the greater opening-up of frontier markets to international investors.
Hardenberg says this opening-up has followed weakening of commodity prices more recently, reducing revenues for many natural resource-rich frontier economies.
“Commodity exporters had to do very little to make themselves happy and there was very little reform taking place,” noted the manager.
He added: “When commodity prices corrected dramatically, a lot of countries had to go back to the drawing table and reform.”
One example of a country that enacted significant reforms was Egypt, which allowed its currency to float freely as part of several measures designed to facilitate a loan from the International Monetary Fund.
Hardenberg says commodity prices have already started to return to normal following earlier lows, but the willingness to enact reform remains, making the frontier markets more attractive than previously.
Valuations in the markets also make for compelling investment arguments, says the manager, noting that MSCI Frontier Markets is currently trading at a lower price/earnings ratio than emerging markets and almost half that of developed markets.
Hardenberg says one of the biggest selling points is that the frontier markets have very little correlation with emerging markets or developed markets. This makes them a potential portfolio diversifier.
Performance of MSCI Frontier Markets index over 10yrs
Source: FE Analytics
While risks remain for frontier markets investors, the managers are confident that active management can help to mitigate some of those.
The pair argue that they carry out thorough assessment of companies before investing and have an experienced team, whereas passive strategies may invest simply based on how the index is constructed in what can be a changeable part of the equities universe.
Top picks in the fund reflect common themes in frontier markets. For example, the fund holds several banks in different countries reflecting the sector’s lack of penetration in frontier markets and the potential for new bank account customers.
Currently the fund has significant overweight positions in Vietnam, Saudi Arabia, Sri Lanka and Egypt.
“Saudi Arabia is one of the most exciting sectors growing right now, from an investment perspective,” says Hardenberg.
The manager highlighted moves by authorities to open-up the market to foreign investors, which could see it enter the benchmark indices at the next review by index providers.
Other countries, like Vietnam, have strong supporting demographics or have embraced reform, such as Egypt.
The portfolio’s main underweights are Argentina and Kuwait, although the managers have highlighted the progress made by reform-minded Argentinian president Mauricio Macri who has set about investigating corruption and returning to the international capital markets.
The fund was soft-closed in June 2013, however, it is set to be offered to new investors from 31 May.
Performance of fund vs benchmark since launch
Source: FE Trustnet
Since launch in 2008, the $881m fund has returned 169.76 per cent compared with a 43.43 per cent gain in the benchmark MSCI Frontier Markets index.
Last year the fund – which resides in the IA Specialist sector – rose by 31.23 per cent compared with a 22.46 per cent rise in the benchmark.
According to its key investor information document, the ongoing charge figure (OCF) for the fund was 1.75 per cent for the year ending 31 December 2016.