The move is despite the investment trust, managed by Sam Vecht and Emily Fletcher (pictured), ranking top for Global Emerging Markets investment trusts over a three-year period, returning 62.3% compared to 32.4% in the sector, according to FE.
The proposal was first mentioned in the investment trust’s annual report from December, but the latest Regulatory News Service (RNS) has set the general meeting to vote on the changes for 27 March. If approved the changes would go into effect from 1 April, the day following the company’s half-year end.
The frontier markets investment trust currently invests in countries that do not feature in the MSCI Emerging Markets or World indices. It is also allowed to invest in Colombia, Egypt, Peru and the Philippines.
The board of the investment trust wants to expand its investible universe to all but the eight largest constituents of the MSCI Emerging Markets index, arguing a number of frontier markets have been upgraded to emerging markets since the trust’s launch in 2010.
The UAE, Qatar and Pakistan have all graduated into the emerging markets index over that period, with Argentina currently under review and widely expected to be promoted out of its current frontier status, as well as Nigeria. Meanwhile, Morocco is the only fund that has been downgraded since 2010.
“Currently, the eight largest countries in the MSCI Emerging Markets Index have a combined market capitalisation equal to approximately 85% of the index: being Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan,” an RNS filing from the board on Wednesday said.
“The other 16 countries represent approximately 15% of the MSCI Emerging Markets index. These 16 countries share many characteristics with the markets which are defined in the company’s current investment policy as ‘frontier markets’, and are often overlooked by investors in emerging markets.”
Continuous reclassification
Morningstar manager research analyst Lena Tsymbaluk said constant index reclassification has created uncertainty for frontier markets and stymied liquidity.
Tsymbaluk said Argentina accounts for 22.6% of the existing index and Nigeria represents 7.8%.
“Frontier-markets managers are forced to continuously research new areas/countries and sell existing stocks in bulk following reclassifications, which explains why some of them would want to continue investing in those markets,” she said.
Reclassification does not stop many funds remaining invested in markets, Morningstar data shows. The Morningstar Global Frontier Markets Equity category average currently has 6.9% in UAE and 3% in Pakistan.
“As this is a fairly illiquid asset class, we like the investment trust structure for investing in this space,” Tsymbaluk said.
The Association of Investment Companies communications director Annabel Brodie-Smith said a board’s ability to propose changes to investment mandates is one way investment trusts and companies set themselves apart from other types of funds.
“This extra layer of oversight is a major benefit of the structure,” Brodie-Smith said.
