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.
The more ‘frontier’ in nature funds are perceived to be, the less likely they are to even register with European investors.
The filtering process found no fund offering exposure to Bangladesh to Italian investors, for example.
Iran remains a particularly difficult place for westerners to do any sort of business, given current geopolitical factors. Investing there is typically done indirectly – for example, in European companies doing business in Iran – via investments that would register as ‘European equity exposure’, not as an investment in Iranian assets.
Frontier markets investing also suggests heavy focus on particular sectors, given the lack of economic diversification in some of the countries.
Both FMG and Cube Capital have announced products that are considering investing in that country, but FMG’s portfolio was set to be 42% in miners. FMG actually also included Vietnam and Myanmar alongside Mongolia in its fund, citing sector diversification problems in too narrowly focused a fund.
In a similar vein, Mozambique is heavily reliant on revenues from hydrocarbon exploration and extraction to fund its economic growth, and any diversification of the local economy, recovering from a brutal recent history, will take time.
Nevertheless the FE database named 10 funds as offering exposure.
The tiny ($1.9m) British Virgin Islands-domiciled Imara African Resources fund had the biggest proportional exposure, at 8.6%, with precious metals and stones making up more than 34% of its portfolio.
The fund size alone would make it unsuitable for most selectors, quite apart from the sector diversification within the portfolio.
Other challenges emerge for investors looking for a definitive list of the most under-developed markets, in the expectation they could stand to develop most rapidly over time.
The UN lists about 50 countries with ‘Least Developed Country’ status (http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_list.pdf).
Some have only joined the list in the past decade, as a result of becoming independent nations, but others have been recognised as LDC since 1971.
For some that means more than 40 years in the category – far longer than most people retiring in Europe today will have been accumulating pension pots.When discussing ‘long-term potential’, therefore, it is wise to recognise the reality some frontier markets simply do not make the progress, or the returns, that fund investors require.
Then there are the tragic cases of countries that approach the cusp, only to be dragged back by events beyond their control. Samoa, for example, saw its rise out of UN LDC status put back by several years by a tsunami in September 2009.
CIVETS and N11 ex Iran
Pilippines and Bangladesh vs. Germany,France, Italy