Focus on frontier markets – single country focus hard to find

Single country frontier markets equities funds are capable of providing some eye-watering returns on acceptable volatility, the problem is there are not many to choose from.

Locally domiciled single country funds, such as the Schroder Dana Prestasi Plus (Indonesia) and Philequity Inc (Philippines) have shown the ability to provide comparatively benign risk/return profiles, when compared to funds invested in developed countries.

In the decade to 31 July these frontier markets funds returned 849% on annualised volatility of 26% (Schroders), and 589% on volatility of 19% (Philequity), callibrated gross in euro terms, according to FE data.

Over the past three years the return/volatility figures are 189%/17% (Schroders) and 88%/17% (Philequity).

These figures compare favourably against funds invested in core eurozone, North America or Japanese equities or bonds.

There is, of course, the challenge of risks other than volatility when investing in funds domiciled in these frontier markets.

Currency risk is one, political and legal risk are others – remember the capital controls Malaysia imposed during the Asian crisis of the late 1990s?

A simpler option for European investors is to select funds for sale onshore in their own markets, rather than seeking out far-flung domiciles.

However, this presents a problem of choice, and requires a keen focus on the portfolio construction, depending on what market exposure the investor is actually looking for.

For example, filtering for funds available for sale in Germany that offer more than 10% exposure to Colombia, only one comes up – the UBS (Lux) Emerging Economies fund (Latin American Bonds).

Filtering for Nigeria on the same basis finds just 13, then 48 for South Africa, and 82 for Turkey.

One thing this immediately suggests is that there is more likely to be fund access if the frontier market is closer to German investors, or is targeted more by them, or has greater cultural and historical links.

What about performance? The best performing fund offering exposure to Turkey – the HSBC GIF Turkey Equity – returned about 72% in the three years to the end of July on annualised volatility of about 31%.

The best performing fund offering exposure to South Africa and for sale in Germany was the Reyl (Lux) Global Emerging Markets Equity USD. For about 82% return, it served up annualised volatility of about 14%.

The JPM Africa Equity offered 54% return against volatility of about 15%. Again, these are all figures that compare favourably against the financial crisis-ravaged West.

Only since April have German investors had access in Ucits onshore format to the Colombia Equity fund, in a strategy run by Bolsa Y Renta.

For investors in France, on a similar filtering basis, there were 19 funds offering exposure to Indonesia. The best performer over three years – the BNP Paribas L1 Equity Indonesia Classic – made investors 115% on annualised volatility of about 22%.

Among the 51 funds offering exposure to Mexico, the UBS (Lux) Emerging Economies Fund (Latin American Bonds) tops returns over the period.

Of three funds offering exposure to Vietnam, it is the BNY Mellon Vietnam India & China fund with the least negative return, of about -14%, on volatility of 23%.

When looking at funds for sale in Italy offering exposure to Egypt, the DWS Invest Africa offers return of about 30% over three years, with volatility of about 17% annualised. But that is out of a small range of just six funds, and one of these has only been on the market for about one.

South Korea is probably the furthest away from being a frontier market among this grouping, given its membership in the OECD. Therefore there are 119 funds available to the Italian investor.

The Templeton Asian Smaller Companies fund made about 91% on volatility of 17% over the period.

Another trend is evident – funds available for sale in Europe, offering only partial exposure to any of the markets mentioned above, may make less than the locally-domiciled, single country funds.

The list of countries above consists of the so-called ‘CIVETS’ and ‘N11’, two of the better known groupings of markets that industry practitioners have identified as potentially faster growing economies in future.

CIVETS stands for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, while the N11 also includes Iran, Bangladesh, Nigeria, Pakistan and the Philippines.

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