Focus on frontier markets – Advance Frontier Markets fund offers ‘triple discount’, says Jefferies

Investment bank Jefferies has highlighted the Advance Frontier Markets investment trust as offering a “triple discount” for investors, as it has beaten fund peers, frontier market indices, yet its shares trade 14% more cheaply than the per-share value of its investments.

The portfolio of closed- and open-ended funds is listed on the London Stock Exchange and is run by $800m frontier markets specialists Advance Emerging Capital, which has run money since 1998.

The fund’s 13.9% share price discount to its net asset value compares favourably – for new investors at least – to the trust’s historical average discount to NAV of 9.8%.

When discounts on the funds that AFM invests in are also taken into account, the gap to NAV for AMF becomes a far wider 24%.

Jefferies adds frontier markets to which AFM is indirectly exposed via local managers are themselves also “already attractively priced”. AFM limits its direct investments in frontier markets to 5% of assets.

“Taking into account this ‘triple-discount’ opportunity together with the company’s outperformance of both the Frontier Markets index and listed peers alike, we believe AFMF is an attractive long-term investment at the current share price,” Jefferies’ investment companies team wrote in a report released yesterday.

Advance Emerging Capital bases its case for frontier markets on four core theses.

These are a low correlation of frontier markets to other asset classes, and to each other, due to “their greater dependency on domestic factors, rather than global capital flows”. Research by Bank of America Merrill Lynch found since 2005 EMEA frontier markets had a correlation of only 77% to other frontier markets, and a -79% correlation to emerging markets.

AFM also points to the fact there can be “similar volatility to developed markets” due to the diversification benefits.

There are also strong macroeconomics, including rapid growth and healthy balance sheets, in frontier markets, AFM notes.

Furthermore, frontier markets are poorly covered by analysts, providing “barriers to investment, where active managers can add value”; and frontier markets are attractively valued compared to other emerging or developed markets.

In regards AFM, Jefferies notes the management team has suffered no departures in 14 years running money. The senior managers are Slim Ferriani (CIO/CEO), Bernard Moody, Andrew Lister, Samir Shah, Viktor Broczko, and investment consultant, Christopher Brader, and senior advisor Nigel Wilson.

The analysts at Jefferies add the AFM fund is more diversified than the MSCI Frontier Markets Index, which is restricted by free-float and investability rules to be two thirds weighted in Qatar, Nigeria and UAE. AFM’s four largest country exposures, by contrast, amount to just one third of its assets, with only two countries at 10% (Nigeria and Qatar).

The index covers 147 companies in 25 countries, whereas AFM covers over 50 markets and a combined universe of around 500 companies – “better representing the frontier markets theme”.



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