It`s counter-intuitive to think of wild west of frontier markets having less volatility than developed or developing markets but that’s exactly what they offer. I met with the manager of one of the sectors leading funds Sam Vecht, who manages BlackRock Frontiers Investment Trust (LON:BRFI) recently to listen to him put his case for frontier market investing.
Sam Vecht, who heads BlackRock`s emerging market equities desk, describes frontier markets as being where emerging markets were 20 years ago. “They have similar levels of GDP and P/E`s BUT no two stories are the same, no two events turn out the same way and that is important to bear in mind” said Vecht.
Frontier markets feature the world’s fastest growing economies. They have an abundant supply of natural resources, and they’re increasingly offering yield in the form of dividend payments. For Vecht though, their most valuable feature though is “they are cheap, they have cheap valuations” he emphasised.
There is of course significant risks in Frontier markets, as there are in emerging markets. “There`s much greater legal and political risk compared to developed markets”. But Vecht argues why bother with emerging markets if you can get a better return from frontier market investing. Frontier markets have been growing every year for the last 20 years at 5% per year.
Who? What? Where?
Countries that qualify for frontier market status are rather subjectively selected by the two major indices firms FTSE & MSCI. They don’t even agree with each other on who are frontier, emerging or developed economies. FTSE classifies South Korea as a developed economy, whereas MSCI classifies it as a developing or emerging market economy. Pakistan and the United Arab Emirates (UAE) are classified as emerging markets by FTSE but as frontier markets in the judgment of MSCI.
There are circa 192 members of the United Nations. 204 countries are members of the Olympic Committee. 40 or so of these are classified by MSCI as developed or emerging, this leaves us with 150 different countries to consider. “We are focused far more on delivering the best returns to our clients, and far less on index composition” added Vecht.
“The BlackRock Frontiers Investment Trust is measured against the MSCI Frontier Markets Index and so the classifications in that index are the…
