Funds put frontier lands on the map

By David Stevenson | March 2012

Investing in frontier markets can sometimes be a lonely, even depressing experience for a fund manager. For every “go-go” country – such as Mongolia, where the local stock market has stormed ahead – there’s usually a longer, sorrier list of markets from which investors have beaten a rapid retreat.

Take the frontier markets tracked by the MSCI index. There are very few star performers: only Jamaica, Trinidad and Qatar. But there are plenty of horror stories: nearly all of eastern Europe, Sri Lanka and Bangladesh – all were down by more than 24 per cent in the past 12 months. 

In fact, frontier markets – in aggregate – have had a miserable few years, and now mostly trade on, or near, historically low valuations.

Yet for Slim Feriani of specialist fund manager Advance Emerging Capital, this just means opportunity. “Frontier markets are the cheapest equity markets globally, trading on single-digit forward earnings multiples, 1.5 times price-to-book value ratios, and an average dividend yield exceeding 5 per cent,” he says. “Frontier markets remind us of emerging markets 10 to 20 years ago, but starting from a much stronger base. And we all know how well emerging markets performed over the past 10 to 20 years.”

It’s an optimistic view – and one that fails to resonate with investors who can pick up cheap, European mega-caps at near-bargain prices. As one institutional investor told me: “Why bother with frontier markets when you’ve got such quality stuff on your doorstep?”

So I don’t envy the task faced by one of the most adventurous investors on the planet: Douglas Clayton, managing partner at Asian fund management firm Leopard Capital.