There is growing belief among investment experts that emerging and frontier markets could be some of the most exciting places to invest over the coming few years.
Not that emerging and frontier markets have been in a rut lately, they haven’t. As the chart shows, performance has been very decent for the past couple of years. Jupiter’s Emerging and Frontier Income Trust (JEFI), floated in May 2017 raising £90m, is noteworthy as the first new issue in this part of the funds space since 2014.
Yet even as discounts have narrowed across the funds universe, emerging markets funds continue to trade on an average 10% discount to NAV (net asset value, as at 31 January), according to numbers crunched by analysts at Liberum.
This has widened further following the global markets sell-off in recent weeks. But this risk-off environment ‘could provide a value buying opportunity for many of the funds for whose discount had tightened in recent years,’ reckon Liberum’s research experts.
STOCK PICKING & ACTIVE MANAGEMENT
‘Emerging, and especially frontier, markets would be where we would expect active management to be able to create most value and generate high returns,’ believes Liberum.
According to Morningstar, actively managed funds invested in emerging markets have outperformed passives 60% of the time since 2012. These markets tend to be less efficient and less liquid, data is less available and they can be more volatile, vulnerable to political instability and other shocks.
This all suggests that there is a big advantage for investors in having access to local expertise and on-the-ground data provided by a fund management team.
Emerging markets funds have yet to re-rate meaningfully and the recent global sell-off and risk-off outflows could provide an attractive buying opportunity.
THREE FUNDS TO CONSIDER
Fidelity China Special Situations (FCSS) 243.5p
Discount to NAV 12.4%
Focuses its value-orientated investment strategy on ‘new China’ opportunities, investing in companies serving the growing middle class and leveraging increasing private consumption trends and technology.
Over 70% of the portfolio is in consumer and information technology sectors.
Top three sectors
IT 39.3%
Consumer discretionary 31.6%
Industrials 13.9%
BlackRock Frontiers Investment Trust (BRFI) 162.5p
Premium to NAV 3.8%
Invests in harder to access frontier markets. The fund's central thesis is that frontier markets are uncorrelated with emerging markets, the world economy and with each other, creating attractive stock picking opportunities.
The lack of correlation and part of the reason the stocks are so cheap is that the vast majority of investors in frontier stock markets are local and the fund is one of very few foreign investors in many of these markets.
A change of mandate in 2016 means that the fund may continue to hold positions in countries that are promoted from frontier to EM status, which retain frontier characteristics such as Pakistan, Colombia, Egypt, Peru and The Philippines.
Top three sectors
Financials 38.1%
Consumer staples 10.7%
Energy 9.5%
India Capital Growth (IGC) 108.5p
Discount to NAV 6.8%
Invests in a concentrated portfolio of mid-cap stocks, with an investment universe of c.400 stocks (compared to circa 70 large cap opportunities), enabling exposure to India's growth story through dynamic smaller companies.
It is orientated towards the growing power of the Indian consumer through high exposure to retail banks.
Top three sectors
Financials 24%
Materials 20%
Consumer discretionary 17%
