European fund buyer sentiment towards frontier market has dramatically dropped from Q2 where it was the ninth most-liked asset class out of 26 to 22nd in Q3, according to Last Word Research.
European fund selector frontier market sentiment
Source: Last Word Research
When broken down, during Q3, 12% of fund selectors were looking to increase their allocation towards the asset class over the 12 months to September 2019, 33% to hold, 15% to decrease, and 40% did not use the asset class.
Frontier market equities fund selector buying intentions Q3’18
Source: Last Word Research
Despite the slump in sentiment, Danish BankInvest investment committee member and senior product specialist, Jens Rundager said it was still worth investing in the asset class.
Rundager said year-to-date returns had been affected by currency weakness but overall structural growth and performance in many key frontier market economies remained positive.
Argentina hits frontiers universe
“Argentina has been the big bad guy in the [frontier market] universe this year and it has quite a big exposure in the benchmark – typically between 15-20%. In 2017 Argentinian equities returned 57% – this year they are down 46%,” Rundager said.
“We see a stabilising situation and an overreaction on the currency and equity pricing, so we are keeping our exposure there.
“You could say if we had excluded Argentina completely in 2018 it would have been quite a nice story with a slight positive return, but you can’t exclude an entire country. But a huge part of the universe is Argentina still and we think it’s worth investing in.”
Index provider MSCI is due to upgrade Argentina from ‘frontier’ to ‘emerging’ market status in May next year.
Frontier vs emerging markets vs Brics
While Rundager said his exposure to frontier equities was not a base exposure he said he did prefer frontiers over emerging markets and Brics due to the structural growth story and that it was worth having a high exposure based on valuations.
“For valuation right now, the broad EM space and the frontier space is priced at quite neutral relative levels but what we think and believe is the growth earnings momentum will take up the frontier space sooner and later in the broad EM space,” he said.
He said the structural growth story centred around the rising domestic consumer and that he liked consumer and banking stocks.
Liquidity and volatility in frontier markets
Rundager noted that liquidity for frontier markets compared to main markets would be the biggest challenge but this was not a huge issue for him as he had a long-term investing horizon.
“Volatility and illiquidity could be an issue at some point if the cycle turns – at least over the short-term,” he said.
“In [frontier markets] even though it’s a smaller and an off-benchmark allocation, it’s a story that’s easy to relate to. [For the] long-term investor it’s definitely worth paying attention to,” he said.
Top frontier market funds for European investors
According to Morningstar and FE Analytics data, the top performing frontier market fund over the three years to 30 September 2018 was Magna new Frontiers N Accumulation at 80.7%. The fund was also the top performer for the five years to 30 September at 95.97%. However, over the one year to 30 September 2018, the fund lost 8.03%.
According to its factsheet, the fund has its highest country allocation towards UAE (20.4%), Vietnam (20.3%), Saudi Arabia (19.7%), Kuwait (16.5%), and Romania (5.4%). Its largest sector exposure was to financials (52.6%), consumer discretionary (21.6%), healthcare (9.1%), consumer staples (3.5%), and real estate (2.7%).
Polunin Discovery Funds’ Frontier Markets Fund followed at 46.2% for the three years to 30 September 2018.
Margetts Fund Management’s MGTS Frontier Adventurous R fund followed with a return of 46.05% over the three years to 30 September 2018. The fund was the second top performer for the one year to 30 September 2018 at 0.66% and was only one of two funds that made a return during that period.
T.Rowe Price Frontier Markets Equity I USD fund over the three years followed with a return of 43.05%.
Rounding out the top five was BMO LGM Frontier Market B USD at 41% for the three years to 30 September 2018.
| Name | 5 years to 30 Sept 2018 return (%) | 3 years to 30 Sept 2018 return (%) | 1 year to 30 Sept 2018 return (%) |
| Magna New Frontiers N Acc | 95.97 | 80.71 | -8.03 |
| Index: MSCI Emerging Markets TR in GB | 50.88 | 65.24 | -2.05 |
| Polunin Discovery Fds – Frontier Mkts Fd | 87.41 | 46.29 | -9.13 |
| MGTS Frontier Adventurous R in GB | 53.99 | 46.05 | 0.66 |
| T. Rowe Price Frontier Markets Eq I USD | 43.05 | -8.00 | |
| BMO LGM Frontier Market B USD Acc | 45.53 | 41.04 | -1.23 |
| Index:MSCI Frontier Markets TR in GB | 41.31 | 34.25 | -6.56 |
Source: FE Analytics, Morningstar
All the top five funds beat the MSCI Frontier Markets index that returned 34.3% over the same period. Only the Magna fund returned above the MSCI Emerging Markets index that returned 65.2% over the same period.
The top funds were found using Morningstar that were open-ended UK funds, and FE Analytics that were either in the Investment Association or Association of Investment Companies universes that were available for UK investors.
