Against rampant volatility in established markets, Franklin Templeton’s Mark Mobius believes investors will gain from greater performance and falling macroeconomic risks in emerging and frontier market equities.
Rapid development is also underway in the frontier markets where Haglund focuses his portfolio, despite an even lower income base for many of their inhabitants. Broadly, the portfolio centres on emerging Europe, the Middle East, Latin America, the Caribbean, Africa, and Asia. Haglund is particularly keen on Africa.
IMF data shows that in the decade to 2010, six of the world's 10 fastest growing economies were in sub-Saharan Africa.
But growth is "not the entire story", says Haglund. Several frontier market economies are benefiting from greater openness, increasing FDI, more democracy, and reduced conflict. While some other emerging markets are exposed to the greater volatility that affects developed markets, MSCI data shows a low correlation between frontier and developed market activity.
Demand for domestic credit
Haglund especially likes financials, due to growing demand for domestic credit driven by improving incomes. In 2011, Qatar saw bank lending to its public and private sectors rise to 35%, while in the US it was just above 5% and in Germany lending actually retracted.
In Bangladesh, lending was between 20% and 25%, despite only one in 12 of the population holding a bank account.
Haglund argues the sector carries much less risk in frontier markets than elsewhere in the world. Tier 1 capital ratios are around 15% versus seven or eight per cent in Europe. Loan to deposit rates are 60%, whereas in Europe they are typically 250%.
Despite largely underdeveloped equity markets in many of the countries they consider investing in, Mobius and Haglund often use Western companies' subsidiaries or those that earn a substantial proportion of their revenues in developing countries to access growth, such as HSBC Saudi Arabia and Nestle Nigeria.
Within the FTIF Templeton Frontier Markets Fund, a third of holdings are in the Middle East. Twenty five per cent is invested in Africa, and of that 12% is in Nigeria.
For Latin America, Haglund favours Peru, Columbia, and Panama. Banks make up 32% of the overall frontier markets portfolio, and 19% of the FTIF Templeton Asian Growth Fund.
Energy and telecoms are 15% of the frontier markets investment respectively, while energy is a central theme within the Asian fund at 35% of total holdings.
The top frontier market holding is an energy company called Kazmunaigas in Kazakhstan, at 7%. The same share is dedicated to PetroChina within the FTIF Templeton Asian Growth Fund. China is the dominant geographical exposure, at 33% of the portfolio.
Emerging Markets v. World v. US indices since 1987: