As described in Take Your Portfolio To The Next Frontier, frontier markets offer investors the potential to reap healthy investment gains, helped by their strong projected economic growth, while also providing some portfolio diversification benefit from lower correlations with other financial markets. Nevertheless, their small market capitalisations, lower liquidity and less-developed stock markets mean that there are precious few options for investors who want exposure to this fast-growing segment within the broader global emerging markets. In this week’s “Idea of the Week” segment, we highlight several funds which offer investors exposure to the frontier markets.

Templeton Frontier Markets Fund

Among the various funds on the platform, the Templeton Frontier Markets Fund offers investors the most direct exposure to the segment. The fund was launched only in October 2008, but has since impressed with its strong outperformance of its benchmark, the MSCI FM Frontier Markets index. As of 31 July 2012, the fund’s largest holdings (by country) were in Nigeria, Kazakhstan, Qatar and Vietnam, deviating significantly from the benchmark (which had almost a third in stocks from Kuwait), and coupled with the strong outperformance since inception, suggests that the manager employs a highly active (benchmark-agnostic) approach to managing the portfolio.

MENA Funds

The three MENA (Middle East and North Africa) funds on the platform may also be interesting for investors seeking exposure to the various frontier markets located within the region (which includes markets like Jordan, Qatar, Kuwait, the UAE and Oman). Nevertheless, these three funds have had rather different fortunes in 2012 so far, owing to the disparity in their investment approaches. The Schroder ISF Middle East SGD A Acc  has delivered a rather strong 19.6% year-to-date return (as of 12 September 2012), helped by its fairly large allocation to Turkish equities – the fund held 35.1% of the portfolio in Turkey, as of 31 July 2012; the Turkish equity market has delivered a 34% return over the same period. The fund’s benchmark is 80% MSCI Arab Markets and Turkey + 20% Saudi Arabia Large/Mid Cap.

In contrast, the Amundi Oasis MENA Fund SGD and ING Inv MENA USD have delivered returns of 5.7% and 4.3% year-to-date, a function of not owning strong-performing Turkish equities (as compared to the Schroder ISF Middle East SGD A Acc). Both have allocation to Qatar and Kuwait, while the ING Inv MENA USD’s fairly large allocation to each of its top-10 holdings suggests a more high-conviction approach vis-à-vis the Amundi Oasis MENA Fund SGD.

Emerging Europe, Middle East & Africa equity funds

With Nigeria being one of the larger investable frontier markets at present, it is worth mentioning the “Emerging Europe, Middle East and Africa” equity funds on our platform. We have previously highlighted the Fidelity EmEur MidEast & Africa A USD in “Idea of the Week: 3 Recommended Funds You Haven’t Heard Of Yet [13 July 2012]”, highlighting the use of the fund alongside a Latin America equity fund for allocation to global emerging markets, to avoid over-concentration in Asia ex-Japan. As of 31 July 2012, we note that the fund held 7.3% of its assets in Nigeria (along with 1.7% in another frontier market, Kenya). Its peer, the JPM EmEu MEast & Africa SGD A Acc, held 3.6% of its assets in Nigeria, with a further 2.2% and 2.1% in Kazakhstan and Qatar respectively.

LionGlobal Vietnam Fund

Within Asia, Vietnam is one frontier market which is gradually opening up its doors to overseas investors. On the platform, the LionGlobal Vietnam SGD  provides exposure to Vietnam stocks, and is benchmarked against the FTSE Vietnam Index. While the fund has generally not fared well since its inception in February 2007, the fund has still delivered outperformance against its benchmark, highlighting the positive impact of an actively-managed strategy (the fund manager has the option to invest in companies listed outside of Vietnam, but which derive part of their revenue from Vietnam and the Indo-China region). 

While the fund has the dubious honour of being one of the worst-performing funds on the platform (over a 5-year period), this may be attributed to the excessive valuations of the Vietnam equity market previously (see Chart 1). Valuations have since receded, and the market currently trades at 9.9X 2012 earnings (as of 14 September 2012), a far cry from the 30 – 40x PEs seen in 2007, suggesting that the market is a far more interesting investment proposition currently.  

Chart 1: Vietnam equity valuations