The Next Big Thing? Investors Switch From Emerging To Frontier Markets

Taylor Scott International News

27 Aug 2013 | 11:08 Anna Fedorova The poor performance of emerging market equities year-to-date has caused investors to turn to frontier markets in search of better returns. Assets under management in frontier market funds have more than doubled to $3.1bn since the start of the year, according to BofA Merrill Lynch, while EM funds have suffered outflows of $2.1bn. Frontier markets are enjoying a strong year, with MSCI Frontier Markets outperforming both developed and emerging market equities with a return of 14.7% for the year to 20 August, versus 12.1% for the MSCI World and 11.7% for MSCI EM. Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said underperformance from major Asian markets in particular has led investors to look further afield. “With China having disappointed since the 2008 crisis, investors are now looking for the next big thing.” Charles Hepworth, investment director in charge of GAM’s discretionary fund management, has recently sold a global emerging markets fund and replaced it with Templeton Frontier Markets. “Frontier markets are a key area in the emerging market universe for us at the moment and we are shunning more generalist EM funds,” he said. Choosing a frontier markets fund can be tricky, as there are few on offer and many have recently soft-closed due to liquidity constraints. The Templeton fund soft-closed in May at $2bn and Goldman Sachs Asset Management soft-closed its Next 11 fund, which offers exposure to similar countries, in June at $1.7bn. Mona Shah, co-manager of multi-asset portfolios at Rathbones, tipped Renaissance Asset Management’s Eastern European fund as an option for investors wanting to gain access to these markets. Shah added that if the group was to overweight emerging markets, this would be an interesting option due to its exposure to high beta markets, particularly Russia. Meanwhile, Ben Seager-Scott, senior research analyst at Bestinvest, highlighted the BlackRock Frontiers investment trust, which has returned 48.7% over the year to 9 August, according to Morningstar. “The investment trust format means you do not have to worry so much about liquidity because it has a limited life, and it has a sizeable team covering the region, which is very important,” he said. Baring Asset Management is the latest provider to launch a Frontier Markets fund, and Seager-Scott expects many competitors to follow suit over the next ten years. The top performing global frontier markets equity fundsover one year to 19 August are the Schroder ISF Frontier Markets Equity and Charlemagne Magna New Frontiers funds, which have returned 38.9% and 24.3% respectively. Shah said frontier markets are particularly interesting because they have remained uncorrelated to both developed and emerging markets equities, with a correlation of 0.6% for the respective MSCI indices. Before the 2008 crisis, frontier markets followed the performance of developed and emerging equities but, after the crash, money failed to flow back into these markets. Seager-Scott said: “I particularly like frontier markets because they are not as mainstream as emerging markets and therefore not as sensitive to hot money flows and investorsentiment. When investors go into risk-off mode, they pull money out of EM, but that does not happen in frontier.” However, he cautioned frontier markets should be considered a long-term investment owing to their volatile nature. Taylor Scott International

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