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“There is a portfolio diversification benefit because frontier markets are largely uncorrelated to other markets.”


Oliver Bell, portfolio manager of the T. Rowe Price Frontier Markets Equity Strategy, talks to portfolio institutional about inefficiency, opportunity and diversification.


What sits at the core of the investment case for frontier market equities? For investors today, frontier markets are an attractive source of growth and diversifica- tion which have been largely overlooked by investors.


In terms of growth, GDP growth in frontier markets is expected to outpace emerging markets and significantly outpace devel- oped markets over the next dec- ade and likely beyond. In most cases, this is because they are starting from a low base, with significant


investment still


In most cases, frontier countries are not tied into global manufacturing supply chains, so they are less impacted by global cycles and tend to react more to their own local news-flow. For example, what hap- pens today in Vietnam is independent from what happens in Nigeria, or Romania, Kuwait, and so on.


While there may be pockets of volatility, in


going into basic infrastructure. If you take that as a starting point, it is similar to how many emerging market countries were 20 or 30 years ago, since when coun- try investment returns have been highly correlated to nominal GDP growth. When it comes to its diversification poten- tial, whilst frontier is often perceived as being at the riskier end of the spectrum, data shows that in aggregate it is actually one of the least volatile equity regions. Still today few investors have any meaningful exposure to these countries, which means that in a risk-off environment, frontier often tends to hold up relatively strongly compared to the more mainstream emerg- ing markets. Over the last five years, for example, the MSCI Frontier Markets Index has generated returns with approximately just two thirds of the volatility of the MSCI Emerging Markets Index.


Another attractive feature is the heteroge- neity of frontier markets, such that histori- cally correlations between individual coun- tries themselves have been extremely low.


The outlook for Argen- tina depends fully on the election.


our view the longer-term direction of travel is clear and adding frontier exposure can provide significant portfolio diversification benefits.


In which countries do you feel that new opportunities are emerging? One area we like currently is Vietnam. Labour costs are still around one third of those in China and foreign direct invest- ment remains strong as many global com- panies look to diversify their manufactur- ing bases. This is being boosted further as businesses increasingly seek to divert sup- ply chains away from China.


As more and more global companies look outside of China, we see Vietnam benefit- ting from associated job creation, wage growth and increased demand for housing.


Other economic metrics are strong, the consumer is in good shape and inflation is


How important is active man- agement when investing in frontier markets?


It is critical. These are the least efficient markets globally. Sell- side coverage is light: on aver- age there are three sell-side analyst estimates per company in frontier. In many cases it is


less or even zero. These markets remain vastly under-researched and under-owned, which makes it one of the least efficient global equity groups.


This presents a huge opportunity for those managers willing to spend the time and resources to conduct the same due dili- gence in their research process as others would for more developed markets. On the other hand, if you are investing passively, you’ll be getting exposure to some compa- nies and countries that perhaps you don’t want exposure to. In our view, the index is not a good reflec- tion of the compelling opportunity set, and in fact just over 65% of the companies we are invested in today are not currently rep- resented in the MSCI Frontier Markets Index.


If information is hard to come by, how can you truly know what is happening on the


well contained, so we are seeing opportuni- ties across sectors including banking, IT, consumer and real estate. Kuwait is another country we like. We are more positive currently than we have been in the past as the country’s banking sector is finally recovering from the aftermath of the 2008 financial crisis.


26 | portfolio institutional | October 2019 | issue 87


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