Is the frontier market still too wild and risky?
It's tempting to seek large returns in volatile sectors – but be careful, warns Emma Dunkley
Sunday 11 December 2011
As Europe sits on the cusp of recession and the UK faces years of low growth, the prospect of investing in a Western economy for stellar returns seems fanciful at best.
As sentiment on the region plunges, more people are turning to the likes of China and those countries dubbed as emerging markets to buy shares, according to a survey by Baring Asset Management.
But emerging markets have come a long way in the past 10 years and are spearheading the global economy to the point where they are no longer fledgling markets facing a teenage growth spurt.
If you are kicking yourself for not investing in the budding emerging markets a couple of decades ago, "frontier" markets such as Kuwait or Kenya are now being touted as the next generation. Between 1992 and 2007, these markets actually had higher rates of growth than the broader emerging markets, at around 12 per cent a year compared with 9 per cent.
"These economies are in the early stages of development, where capital markets have been opening up and there is strong growth potential," says Meera Patel, senior investment analyst at Hargreaves Lansdown. "Frontier markets are at a stage where many of today's popular emerging markets were 10 to 15 years ago."
Although frontier markets have soared over the past two decades, many people are wary of these new kids on the block. They tend to behave differently from developed markets, which can be considered an attractive quality, given the weak outlook in the West at the moment. Ben Seager-Scott, a senior analyst at Bestinvest, says: "Of course, investors need to be aware that these are risky investments and political risk remains high, brought into sharp focus by the various uprisings we saw in this region earlier in the year."
With many of the frontier markets based in the Middle East and Africa, such risks as the Arab Spring remain evident, although there are others lurking beneath the surface. In 2009, fund manager New Star wound up its Heart of Africa trust, and investors lost a sizeable chunk of their money.
Part of the problem leading to the fund's demise is the less mature nature of these markets, and the difficulty this causes when trying to buy or sell certain shares in the region. Patrick Connolly of AWD Chase de Vere says: "The increased volatility and greater risks of investing in frontier markets over recognised emerging markets, with poorer infrastructure and corporate governance, illiquidity and increased political risks, makes them unsuitable for the overwhelming majority of investors."
The thought of buying into frontier markets to make a quick buck would certainly be erroneous. Ms Patel says: "Investors need to remember that these are less developed markets and growth may be achieved over time, but with potential bottlenecks along the way." Among the possible stumbling blocks include a lack of adequate regulations in the country, and fluctuating exchange rates.
But for those who are insistent on seeking potential growth over the long-term via frontier markets, collective schemes are one of the best routes. Investment trusts are one of the most popular products in this space, as they have the scope to invest in smaller and harder-to-trade stocks.
However, rather than buying a fund that invests solely in these countries, there are funds which also have exposure to the broader emerging markets, which can help to dilute exposure to any potentially risky area. Ms Patel says: "I would suggest investors gain exposure to the higher risk markets via an emerging market fund. If risk appetites allow, then a very small exposure to a dedicated frontier markets fund could be an option."
You don't even have to buy into these markets directly to gain access. Ben Willis, head of research at Whitechurch Securities, says a lot of frontier markets are rich in natural resources, so investors buying a commodities fund, say, could gain exposure to these countries via this route. "In addition," he says, "many of these global resource funds invest in developed-market companies whose operations are based in frontier markets."
Despite a shift in sentiment towards the emerging markets, people are not necessarily allocating a greater proportion of their assets in favour of these frontier countries. A lot of people are shying away from equities, as witnessed by the extreme swings in stock markets this year. "Many investors are being forced into equities for yield and growth reasons and are begrudgingly accepting the risk that this entails," says Mr Willis. "However, most are still uncomfortable with taking on excessive risk, and the wide perception remains that investing in frontier markets equates to very high risk."
In a climate where the sovereign debt crisis still rages on in Europe, many people are becoming even more risk-averse, erring on the side of caution. And even though the broader emerging markets have been on the radar for the past couple of decades, it is only recently that people have become more comfortable with investing their money in them.
Ms Patel says: "It will take some years before investors are confident enough to increase their allocation to these specialist funds."
Many advisers think that investors should have less money than in the past in the UK, Europe and the US, with a greater proportion invested in emerging and frontier markets. But investors who may need their money at relatively short notice – if, for example, they are close to retirement – are still recommended to go into less volatile investments such as UK equities, bonds, or even cash savings accounts.
Emma Dunkley is a reporter at Citywire.co.uk
Meera Patel, Hargreaves Lansdown
"Investors should be aware of the risks [of frontier markets], such as lower levels of liquidity, political and economic instability and lack of adequate regulations. If in doubt, I believe investors may wish to consider a broader emerging markets fund which could offer some exposure to the smaller frontier markets."
In the vanguard: the frontier funds
HSBC's research forecasts that by 2050, the size of emerging market economies will increase fivefold and will be larger than the developed world. The main funds operating in these areas include:
Investec's Africa & Middle East fund
Return: Around 18 per cent in the past three years. Manager Roelof Horne. Aims long-term returns via equities of firms based in Africa or Middle East, or which derive a significant revenue from the region. Exposure Nigeria, Egypt, UAE.
Templeton Frontier Markets fund
Return: 35 per cent over three years. Manager Mark Mobius, above. Aims to deliver long-term returns by investing mainly in equities of firms in the region, or that have principal activities there. Main exposure Nigeria, Vietnam, Kazakhstan, Qatar.
BlackRock Frontiers Investment Trust
Formed a year ago. Manager: Sam Vecht.
Schroders Frontier Markets Equity fund
Launched 2011. Managers: Allan Conway and Rami Sidani.
HSBC Global Asset Management's GIF Frontier Markets fund
Manager: Andrea Nannini.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Scottish independence: Ireland since 1919 is a lesson for Scotland in what a Yes vote means
- 2 Thailand deaths: Pair's bloodied bodies found naked on Koh Tao beach
- 3 Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
- 4 Kanye West stops concert after two fans don't stand up - doesn't realise one is in wheelchair and the other disabled
- 5 QS university world rankings: Imperial College London leapfrogs Oxford to join Cambridge as best British university
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
£23m Birmingham cycle scheme is attacked by Tory councillor for not catering to the elderly
Portuguese academic says British are 'filthy, violent and drunk'
iJobs Money & Business
£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...
£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...
£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony