Pre-emerging economies grow increasingly attractive
By Chris Larson
Published: September 8 2008 03:00 | Last updated: September 8 2008 03:00
From Bahrain to Lithuania to Vietnam, a growing number of asset management firms are turning their investment prowess to so-called frontier markets - economies that are too young and underdeveloped to be even considered emerging markets, but which offer the prospect of rapid economic growth. Institutional and wealthy investors are exploring the asset class, though supply is outpacing demand.
"We are seeing increased interest from the institutional and consultant communities, as they have become more aware of this asset class and its attractions," says Constantine Papageorgiou, portfolio manager at Acadian Asset Management. Acadian is one of several firms actively marketing frontier market equity funds to investors.
Frontier markets, sometimes called pre-emerging markets, typically include wide swathes of Africa, the Middle East and eastern Europe, as well as certain economies in Asia and Latin America.
Countries commonly considered frontier markets include Bulgaria, Sri Lanka, Kenya, Morocco and Cyprus.
Investing in such markets carries many risks, including political and regulatory concerns, liquidity constraints, and far less transparency, which can present a challenge for managers to obtain even basic information on companies.
With those significant risks, of course, come the possibilities for sizeable rewards. Frontier markets, as tracked by indices such as the MSCI Frontier Market Indices, have consistently outperformed both emerging and developed markets in recent years. And experts note that frontier economies have very low correlation to developed or even emerging markets equities.
That is drawing attention from investors, "primarily from foundations, endowments and sovereign wealth funds", says Terrance Gray, managing director at DB Advisors, formerly Deutsche Asset Management.
The firm has been investing in frontier markets on behalf of a growing number of its emerging markets separate account clients, and is looking into launching a new fund focused solely on frontier markets.
European investors are showing more interest in the space than American investors, Mr Gray adds. "Europeans tend to be on the forefront, but we are getting more questions from Asia and the US."
Interest from the large US institutional marketplace does seem to be growing, says Brady O'Connell, principal at Ennis Knupp and Associates. The Chicago-based investment consulting firm, whose clients are predominantly US institutions, is talking to a handful of foundations, endowments and public pensions about frontier markets.
"We have seen some limited interest," Mr O'Connell says. "But I think a lot of investors already have their share of risks, and are not chomping at the bit to take on more." He expects interest to pick up in perhaps a year, if global equity markets have stabilised "and if investors are not worried about what is going on in their fixed income portfolio".
For now, Ennis Knupp sees far more supply than demand for frontier markets. "We have seen a lot in terms of product development," Mr O'Connell says
Indeed, several new frontier funds have come to market this year, including GAM's Star Frontier Opportunities, an Irish Ucits fund launched in June.
And in February, HSBC Global Asset Management launched its New Frontiers fund, closing it when it quickly attracted $300m from HSBC Private Bank clients globally. The firm recently created an institutional share class, and will accept up to $200m in additional assets, says Alex Tarver, HSBC product specialist for global emerging markets.
The firm is pitching its fund to institutions round the world. "The interest has been quite strong," says Mr Tarver.
"We have had meetings and conference calls with institutional investors in most geographic areas."
Many of the firms pushing into frontier markets are larger global firms, such as HSBC and Deutsche Bank. But those features alone will not guarantee success, says Mr Gray, who notes that Deutsche has been investing in frontier markets for more than a decade.
"You have to know the region and the companies well," he says. "You have to be on the ground." He believes there are only a handful of firms, including Deutsche, that have the requisite experience and local knowledge to be truly successful in the space. "You have companies that have not spent time in Kenya, that do not even know where Zambia is on the map," he says.
But some smaller firms are also in the space, including Acadian, which launched a frontier markets strategy in early 2007 with $40m. It now has about $150m in assets, says Acadian's Mr Papageorgiou.
"We are seeing strong interest from the types of investors you would expect - endowments and foundations, public pensions, as well as some corporate plans."
No one expects that frontier markets will overtake emerging markets in an investor's portfolio, and experts stress they are not the place for speculation. "We advocate frontier markets as a long-term investment. It is definitely not a short-term, opportunistic strategy," Mr O'Connell says.
Still, there are signals that some managers think retail investors could one day be interested in frontier markets too. "There are currently very few retail funds in frontier markets," HSBC's Mr Tarver says.
"But there is a handful that are coming out, mainly across Europe."
Chris Larson is associate editor on FundFire, an FT publication |
