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Frontier market veterans: how to spot overlooked winners

Frontier market veterans: how to spot overlooked winners

Citywire AA-rated Andrew Brudenell, manager of the Ashmore Emerging Markets Frontier Equity fund, believes investors can make decent profits from these often-overlooked markets.

‘Anyone that understands the longer-term story of emerging markets should love frontier areas. It’s the same story as 30 years ago, but they’re just getting in at an earlier stage,’ says Brudenell, who is ranked second and fourth over three and five years respectively.

Companies in this space are generally more domestic in nature, so they are not affected as much by global capital flows or trade shocks, but it would be wrong to classify them as small-caps.

‘The businesses we look at are potentially industry leaders – it’s just that these industries haven’t penetrated as much, or the country hasn’t grown for structural reasons,’ he says.

To illustrate the point, Brudenell says the average market capitalisation of companies in the portfolio is US$2.6 billion (€2.2 billion), so these are definitely not start-up ventures.

‘They have been around a long time, generate cash, have real balance sheets, and have coped in difficult environments,’ he says.

The fact is these areas are regularly overlooked by the larger-cap, emerging market managers for whom many frontier areas are not on the radar.

‘Our returns have come from a diverse range of places,’ says Brudenell. ‘Within countries it’s been the likes of Argentina, Pakistan, Georgia, Bangladesh, the UAE and Ukraine.’

It’s a similar story within sectors, he says. ‘There’s banking, the cement industry, healthcare, mobile finance and a big slice of agriculture. Once again, it’s pretty diverse.’

Political priorities

AAA-rated Dominic Bokor-Ingram, who runs the Charlemagne Magna New Frontiers fund with Stefan Böttcher, believes there is a simple rule when it comes to investing in frontier markets: Where you have economic and political reform, you have economic growth.

‘Economic growth gives companies the best chance to compound their earnings and, ultimately, that’s how you make money as an investor in the stock market,’ says Bokor-Ingram, who is ranked first over three years.

He says the ideal backdrop requires the right political party to be in power – whether that’s a dictator, state-sponsored capitalism, or a democracy – to push through the necessary changes.

It is then down to being in countries that are going through a positive reform cycle, as well as in the right companies where, as minority shareholders, you can still make money.

‘It has to be a combination of top-down and bottom-up coming together and you have to buy the shares at the right valuation,’ he says.

On a country level, he cites the changes taking place in Vietnam, whose economy had lagged others in its region for many years, as a great example.

‘It brought in a big anti-corruption drive and reform process,’ he says. ‘The economy is now growing faster than other big Asian tigers.’

Domestic dynamos

Bokor-Ingram also works on the theory that the best way to make returns is by focusing on domestic growth, which means utilities, the consumer, banks and healthcare.

‘It’s anything that can take advantage of the rising incomes,’ he says. ‘We also have to believe company managements understand that they are working for minority shareholders.’

This is why corporate governance standards gain a lot of attention.

‘If you run the company correctly then more people will buy your shares,’ he says. ‘Your share price will go up and your cost of capital will be lower when you want to borrow money.’

One stock Bokor-Ingram has held for the long-term is NMC Healthcare, which was promoted to the FTSE 100 earlier this year, and has been in the fund for five years.

‘It’s a company that builds, operates and equips hospitals in the Middle East, particularly the UAE,’ he says.  As well as a clear top-down demographic story, with healthcare being a priority spend for people when they hit middle income, it’s also well run.

‘It’s proven over its five years as a listed company that it can operate well and in a way that maximises the share price and returns to minority shareholders,’ he says.

These comments originally appeared in a supplement published with Citywire Selector magazine’s December edition.

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