Some might say Citywire A-rated manager Andrew Brudenell is a victim of his own success.
His $850 million HSBC GIF Frontier Markets fund is now soft closed as interest in this investment market has rocketed.
At a time when developed world growth is slowing and emerging markets look more vulnerable, frontier investments are coming into their own.
Some of these markets sit on the border line between potential powerhouse and basket case, but over the past five years even generalist investors have started to pay attention.
However, as Brudenell points out, capping the fund was a given from the off.
‘From the moment we launched, we knew it was a capacity-constrained product,’ says the London-based manager, who has run the fund in its Ucits-compliant and mandated forms since inception in 2008.
‘We had a sense of what the capacity was and decided to build and run the strategy as if it were going at full capacity. What we don’t want is our process and our portfolio to change because of the assets under management figure.’
Citywire Global analysis into the largest dedicated frontier market funds found four of the five biggest funds are currently under some form of inflows restriction. Brudenell, who follows a top-down and bottom-up blended approach, is not surprised.
‘Initially I don’t think people knew what we meant and they didn’t quite get it. But now they’ve seen some funds grow quite big, while others have closed,’ he says. ‘We are now soft-closed because we hit that level. If we took in more we wouldn’t be able to run the fund as we have for the last six or seven years.
‘We don’t want to reach a point where we get so much money we can’t own the portfolio we want to.’
Brudenell says the main wave of interest came in the wake of the global financial crisis when developed markets revealed their vulnerability and their emerging counterparts were hit by the knock-on effects.
‘People began to learn a little bit more about what was out there and realised there were some quality companies with balance sheet strength and these economies weren’t all going down the pan.
‘In fact, a lot of them had better sovereign and corporate balance sheets than the developed world and were boosted further as oil and commodity prices began to rebound from low levels.’
Brudenell has ridden out recent storms with assets and performance intact. The volume of the fund, despite slipping back in 2009 and then again in 2011, has risen steadily in the wake of the most recent crisis.
On the performance front, over the three years to the end of September 2011, the fund has returned 84.8% in US dollar terms versus 68.9% from its MSCI Frontier Markets TR USD benchmark.
The main driver for these returns is the portfolio’s diversity, says Brudenell, as well as uncovering growth stories through in-depth research and an understanding of each country’s cultural and political trends.
He points to stocks such as Saudi Arabian investment group Samba Financial, the third largest position in the fund at the end of August, as an example of the opportunities created in growing areas such as financials.
The sector as a whole currently accounts for almost 50% of total exposure, although Brudenell says many investors are very cautious here.
‘We still get questions about whether it is a good idea to be invested in banks. We have followed the sector closely for the last few years and invest in those firms which take deposits and make loans. We make a very nice spread on that, which is good old fashioned banking.
‘There aren’t many off-balance sheet bells and whistles that might get confusing and cause problems. These markets have made a number of regulatory changes to the banking and property sectors to avoid some of the problems they would have had in the past.
‘Let’s not forget we all had those challenges too. It was not something that was an error on behalf of the inexperienced frontier markets, it’s something that happened globally.’
Brudenell has focused his portfolio on areas of the market he believes are insulated against these macro concerns, such as the Gulf Cooperation Council (GCC) countries and emerging Asia. He also considers more offbeat opportunities such as Pakistan and Georgia.
However, while he also likes EM/frontier market crossover stories such as Colombia, Peru, Egypt and the Philippines, he has a more cautious view on Ukraine and Iraq.
Vietnam, which many have viewed as a key component of the emerging Asian growth story, is another market that has taken time to find Brudenell’s favour.
‘We had almost nothing in Vietnam because we didn’t like the macro story, they hadn’t dealt with the fallout of the financial crisis, there was high inflation and we felt that the currency was going to continue to devalue, which it did.’
Regional risks and country concerns
By spreading his investment net wide, Brudenell says the fund is open to an array of opportunities but that comes with a host of country or region-specific challenges.
‘Given how young the asset class is and how relatively old our product is, in the grand scheme of things, it has been relatively well stress-tested,’ he says.
‘We have been through the boom times before 2008 when it all went wrong, the incredibly difficult market shutdown at the end of that year, as well as the difficult period of redemptions and dealing with really small assets in 2009.’
One of the most interesting and exciting things for Brudnell has been how this investment market has moved from the very periphery of investor interest to filling pages across business newspapers and analysts’ notes.
He says there has been a tremendous change in coverage, not just in terms of the capital flowing into funds focused on the sector but with the number personnel on the ground.
‘On our first few trips to Argentina, Nigeria or wherever else we were looking, we met the same sort of people. It was a pretty small group. If you were in sub-Saharan Africa, for example, you’d see just one European guy but it was mainly South Africans there. That has really changed.
‘We started to notice a lot of the American fund managers turning up and it got a lot broader and a lot bigger.
‘The number of competitors has really grown and the geography of where the competitors are coming from has expanded too.’
He adds that the number of conferences focused on frontier market investing has increased sevenfold since he first launched the fund. ‘In 2008, for example, there was one Africa conference in London and last year there were six or seven, there were even two on the same day.’
Making the most of the Middle East
Brudenell has a keen interest in the Middle East. MENA countries, notably those in the Gulf Cooperation Council, make up 42% of his fund exposure and he is adamant these are frontier markets even though indexing companies have recently rebranded them as emerging.
‘At the end of the day our view of these regions fits in with our notion of the product we wanted to create: we wanted to provide something our clients didn’t have exposure to and that encompasses various developing countries and companies.’
Over the life of the fund, Brudenell says he has seen a lot of change in Middle East markets along with plenty of misunderstandings around macro events, such as the Arab Spring which began in late 2010.
‘Take Tunisia, where it all started: the key issue was youth unemployment among a highly educated population and the ball was set rolling by a student who set himself on fire at a vegetable stall in protest. However, the Middle East is made up of widely differing economies and cultures. The Qataris, for example are the world’s wealthiest people on a GDP-per-capita basis, and those in UAE are in pretty good shape economically too.
‘The idea that’s what was happening in Yemen, Tunisia and Egypt was going to spread to countries like this really didn’t make any sense.’
At the time Brudenell responded to market concerns about a wider revolution, along with headlines of Dubai facing financial difficulty, to bulk up his weighting towards certain countries.
‘For us it was all quite positive and we were quite surprised by the level of push back we got from clients who didn’t really like it.
‘We are essentially investing in a region which has fantastic balance sheets given the commodity supercycle we’ve seen. Their finances are a lot stronger than the developed world and a lot of the emerging world and are all dollar pegged – so there is no currency risk and it is all high yielding at a time when there is not much yield out there.’
No rose-tinted spectacles
While Brudenell is upbeat on frontier markets he is well aware that all investors face big concerns. Uncertainty over global growth, US rate rises and oil price shocks are a threat to fund managers everywhere.
‘There are definitely things that can go and will go wrong,’ he says. ‘The difference this time around compared with 2008 is there is less hot money in frontier markets and more dedicated long-term, institutional money.
‘You never really know of course, but hopefully all that investment won’t bail out at the first sign of trouble, which we haven’t seen as yet.’
Back to the cutting edge
Brudenell joined HSBC GAM’s emerging markets equity team in 2007, having previously worked as a global equity manager in the US.
The transition, he says, brought some understandable nerves when he was handed a dedicated frontier markets fund at a time of global uncertainty.
‘We didn’t quite know how large it would get over what period of time and how big a success it would be, but it seemed like a really interesting opportunity,’ he says.
‘It was a chance to get back to really adding value and dig into new companies.’
Brudenell, who takes regular business trips to ensure the country and companies he invests in are developing as expected, believes there is more potential to get under the skin of an exciting growth story.
‘I have essentially gone from being an S&P 500 mutual fund manager where you hop on the Microsoft earnings call on a Tuesday evening and think, what am I really going to add to this? This is more challenging, more interesting and perhaps much more nerve-wracking.’
This article originally appeared in the November issue of Citywire Global magazine