Home' Trinidad and Tobago Guardian : May 11th 2014 Contents MAY 11 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
MUTUAL FUNDS | SBG9
Finding stocks that zig when
others zag is a key goal for
investors, and mutual fund
managers say they re finding
candidates in places that may
be unfamiliar. They re delving
deeper into less-developed
economies, buying stock in Nigerian breweries,
banks in Kazakhstan and cement companies
Trading in such markets is more difficult
and the threat of big losses is higher. But pro-
ponents of so-called frontier markets say they
are where Brazil, China, India and other big
emerging markets were 20 years ago. And while
investing in stocks from those countries may
have seemed wild then, today they re just a
de rigueur part of an emerging-markets port-
Frontier-market investing covers a wide
range of economies from huge countries like
Pakistan, one of the world s 10 largest by pop-
ulation, to Mauritius, which has fewer people
than Idaho. What they have in common are
economies or stock markets that are less devel-
oped than traditional emerging markets, such
as China and Brazil, which are themselves less
developed than the US, Japan or Germany.
Because of their smaller size and increased
risk, conventional wisdom said that frontier-
market stocks should behave like emerging-
market stocks on steroids: They should have
higher highs and lower lows. But over the last
year, frontier-market stocks haven t been
dragged down by worries dogging large emerg-
Over the 12 months ended in April, the MSCI
Frontier Markets index returned 27.9 per cent
in US dollar terms, including dividends. China,
Brazil and other more established emerging
markets, meanwhile, lost 1.5 per cent as meas-
ured by the MSCI Emerging Markets index.
Part of the allure is that frontier markets
aren t yet fully part of the global economy.
They don t have big exporters like South Korea s
Samsung, whose revenue depends heavily on
the global economy s strength. That means
the direction of a frontier market s stocks is
more heavily reliant upon the strength of its
own economy. And expectations for many
frontier economies are high.
The focus on the growth of the local econ-
omy can lead to big differences in performance.
Consider the United Arab Emirates. Through
the end of April it surged 40.4 per cent. Kaza-
khstan, also a member of the frontier index,
fell 7.1 per cent.
Such differences are a positive for investors,
says Rick Schmidt, portfolio manager at Harding
Loevner s Frontier Emerging Markets fund
(HLMOX), which has returned 18.8 per cent
over the last year.
"The individual country risk is very high:
You can have a coup over here and an invasion
over there," Schmidt says. "But because none
of them affects what happens in other markets,
when you own a portfolio of those, you re
actually reducing risk."
To be sure, as frontier markets grow, their
ties to the global economy will likely strengthen.
That means their stock markets would even-
tually move more in sync with other global
markets. But investors now are noticing the
strong performance and diversification that
frontier markets have recently provided.
Big institutional clients and financial advisers
are asking more often whether they need to
be in frontier markets, Schmidt says. So, what s
"If you can handle the risks and hold through
this thing for five years, frontier is an asset
class that is very exciting," he says.
Frontier markets would likely be a small part
of an investor s portfolio. But investors need
to be aware of the risks involved.
Coups, wars and other political risks
When the protests of the Arab Spring swept
through Tunisia and other countries, markets
quickly tumbled. Tunisian stocks lost 19 percent
in the first eight weeks of 2011.
Earlier this year, tensions between Russia
and the United States about Ukraine led to
falling markets around the world. Surprisingly,
Ukraine s stocks have done well: They returned
4.6 per cent through April. That s because of
the increased global attention, which has led
to billions of dollars in loans for Ukraine, says
Nathan Rowader, portfolio manager of the For-
ward Frontier Strategy fund.
"As hard as it is, the annexation caused a
real change in fortunes," Rowader says.
Big losses are possible
Frontier-market stocks are still below their
That s in part because of their particularly
steep declines. In 2008, frontier markets
plunged 54.1 per cent, compared with a 37 per
cent fall for the Standard & Poor s 500 index.
In 2011, frontier markets lost 18.4 per cent,
when the S&P 500 returned 2.1 per cent.
One of the risks in frontier markets is that
stocks are tougher to trade: It can be difficult
to find a buyer when you want to sell.
Prices are higher following a big run
As a group, frontier-market stocks are more
expensive than those of other regions. At the
end of the first quarter, they were trading at
an average 14 times their earnings per share
over the last 12 months. That s higher than the
average price-earnings ratio of 12 emerging
Fund managers say much of that gain is due
to just a few countries and may soon be alle-
viated. The United Arab Emirates has nearly
doubled over the last 12 months, while Qatar
is up nearly 50 per cent. The pair together
makes up about a third of the MSCI Frontier
But both markets are graduating to the MSCI
Emerging Markets index after the end of the
month. Following that, price-earnings ratios
for frontier markets will likely drop.
Costs are higher
Trading stocks in frontier markets is more
expensive than trading in the US, which has
translated into higher expense ratios for fron-
Harding Loevner s Frontier Emerging Markets
fund has a net expense ratio of 2.23 per cent,
for example. That means US$223 of every
US$10,000 invested in the fund goes to cover
annual costs after waivers made by the man-
agers. Lower expenses are available among
frontier funds that track an index. AP
and finding new frontiers
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