Are frontier markets the place to invest this year?

Are frontier markets the place to invest this year?

As several frontier markets funds launch over the past month, opinion is split over whether the region is safe to invest in and the promised super growth will materialise.

In December BlackRock launched the Frontiers Investment Trust, which has a market capitalisation of £101 million. It is managed by Sam Vecht, who also heads the group’s open-ended emerging markets fund.

The trust has an annual management charge of 1.1 per cent and a performance fee of 10 per cent of outperformance of the MSCI frontiers markets index.

Meanwhile Schroders quietly launched the Luxembourg-domiciled ISF Frontier Markets Equity Fund on 15 December, also benchmarked against the MSCI Frontier Markets Index. It is managed by Allan Conway, head of emerging market equities, and Rami Sidani, head of Middle East and North Africa.

It has quickly amassed $50 million (£32 million) funds under management and comes with an initial charge of up to 4 per cent and AMC of 1.5 per cent.

The term frontier markets applies to most of the Middle East, with some Asian, eastern European and African countries thrown in too. The Middle East makes up around 60 per cent of the MSCI Frontier Markets index.

Lee Smythe, managing director of financial planners Smythe & Walter, believes frontier markets are the natural progression for those who have been happy to invest in emerging market funds, as countries like China and Brazil start to mature.

He thinks returns will outperform the more traditional emerging markets, although investors must be prepared to take a higher level of risk.

‘Whilst potential returns are high as these markets develop, potential downside is also large and the volatility of such markets tends to be much greater than more mature markets, meaning that investors should probably be in it for the long haul and prepared for a bumpy ride,’ he comments.

Specific risks include currency, liquidity and political, as well as there being a much smaller number of listed companies in these markets.

Gary Potter, co head of Thames River’s multi-manager team, delivers a damning verdict on why companies might launch frontier markets funds: ‘I believe in 2009 there was also a rush of MENA [Middle East and North Africa] funds, but they are not the right solution for retail needs. They are not suitable for most investors and not the answer to an asset allocation need.

‘They are very niche and volatile; usually when a company’s funds are not performing well they might launch a frontier market fund.’

His colleague Rob Burdett adds: ‘They are usually very marketing-led.’

Since the start of 2010 the frontier markets region has seen fund flows of $2.9 billion (£1.8 billion).

Although returns have been sluggish so far (for the past two years the MSCI Frontier Market index has been a significant underperformer compared to the MSCI Emerging Market index), Swiss & Global Asset Management predicts that frontier markets could see annual growth of 11 per cent over the next 10 years.

The investment firm argues that investors should have a 5-10 per cent allocation to the region, and that Nigeria, Tunisia, Kazakhstan and Mongolia offer particularly attractive opportunities.

However, like the Thames River managers, Martin Bamford, managing director of financial planners Informed Choice, also sounds a word of caution. He thinks frontier markets are too risky and says there are still good opportunities to be had from emerging markets.

‘Rather than selecting a specific frontier markets fund, investors should consider a diverse emerging markets fund or consider having exposure to UK companies that derive some of their profits from frontier markets,’ he says.

If frontier markets are the investment for 2011, more funds could launch soon.

However, Aberdeen Asset Management, which has a large presence in the emerging markets and a frontier markets segregated mandate for a pension fund in the US, says it has no plans to launch a frontier markets fund for retail investors.

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