FMG on investing in emerging and frontier markets
Malta headquartered manager FMG’s Stockholm office continues to find opportunity in emerging and frontier markets.
Iraq and Mongolia are two of the more unusual markets where FMG is seeking ongoing returns, explains Fredrik Edensvärd, who as marketing director helps develop new distribution channels and client relationships.
This type of focus is the result of FMG’s history as a Malta-domiciled
business, serving a particular type of international investor, often expatriates who have worked in the countries in which the funds invest, and who can themselves see the local opportunities that go begging.
In turn this affects the approach to distribution; the manager does not segment end investors by any particular geography, and they are likely to be reached via international IFAs, perhaps using international bond structures.
And it means that the minimum investment size tends to be higher, such as €10,000, as compared with typical retail products, which means it is keen to attract long term investors.
While active in its management, FMG is not a stockpicker per se, however,
but will seek exposure via other managers’ products, leading Edensvärd to describe it as a multi-manager house, having slightly changed from its days in the 1980s, which he describes as more of a fund of hedge funds period.
The manager now has some 12 funds, which, depending on the strategy can invest in underlying funds, ETFs, or directly in the relevant market. What has marked out the FMG way, however is the thematic idea that frontier markets will become emerging markets over time. When this type of change occurs investors can benefit from, for example, the re-rating of asset values.
There are some key factors determining whether or not to add another market to the portfolio of its funds, explains Henrik Kahm, investment
manager at FMG.
Firstly, it needs to be seen if there are any instruments to buy in a particular market. Once it is possible to buy local equity assets, and the macroeconomic case stands up, then it may be possible to initiate the business, either by setting up a managed account via a local broker or perhaps using an ETF, or using other funds to gain access.
FMG does not do private equity type investments, hence it does require a public market of some nature. For a new frontier fund, it is also a case of looking for new countries coming into frontier indices.
Key areas to look at include Southeast Asia and Africa, with countries
such as Vietnam and Nigeria that exhibit decent GDP growth and where
valuations on local markets are reasonable.
The examples of Mongolia and Iraq illustrate FMG’s willingness to set
up its own funds where none exist for a particular market. When countries go from frontier to emerging market status, then FMG and its investors face some interesting decisions.
Kahm notes how a number of long term investors have stayed with the manager’s Russia fund since it launched in the 1990s. However, with development comes increased competition from other asset managers launching similar products. It proves the theme is working, Kahm adds.
Changes to the status of particular markets means adjusting FMG’s
approach. Kahm notes the switch a couple of years ago to focus its
China fund on A shares in order to differentiate from other broader
Kahm says he agrees with MSCI’s decision to introduce a
China weighting slowly, but at the same time FMG is keen not to be constrained to indices.
Another example of the way the manager thinks about opportunities
is in Saudi Arabia; the country has signalled that it wants the local stock
market to be more open to foreign investors, but this will take time, Kahm
feels – not that this necessarily is a bad thing as there is also downside risk to changes that occur too rapidly.
The MENA region has been interesting in the past three years in the
wake of the Arab Spring, with company values falling sharply after former
Egyptian president Hosni Mubarak was removed from office. But the effective
backstop provided by Gulf Cooperation Council members brought back
confidence in the market.
Politically it is a region that is expected to remain challenging but valuations mean that the exposure is worth it. Those who ignore the opportunities risk missing out. In a note published for the first quarter this year, FMG said that Iraq is set to become the second fastest growing economy over the next 10 years, as its oil industry increases production massively.