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June 26, 2015 at 07:29 AM
The final frontier may sound like some place only Captain James T. Kirk might boldly go, but he would not be alone. Advisors who want to invest in these nascent markets on behalf of their clients can be well rewarded with double-digit returns as long as they diversify and manage risk, noted three portfolio managers exchanging views at the 2015 Morningstar Investment Conference in Chicago.
Each manager was bullish on these markets, which are smaller and less developed than emerging markets. Laura Geritz, portfolio manager with Wasatch Funds, considered frontier markets as those along “the old Silk Road trading countries,” including Sri Lanka, port cities in Africa and Tanzania and Vietnam. All three managers were high on Vietnam, while Taizo Ishida, portfolio manager with Matthews Asia, noted that Pakistan is one of the better frontier markets and that he “likes it better every time I go there.”
Geritz said that China was crucial in propelling the Asian frontier countries — and had ulterior motives for backing those markets in its sphere of influence.
“Look at what China is doing, trying to be a superpower and establishing a reserve currency,” she said. “And to do that, they are investing across a lot of frontier countries.” She noted China’s sovereign and development investment made up as much of 20% of Pakistan’s GDP.
Frontier countries do well “in spite of their politics,” she said, adding that what’s occurring in many of these countries is “positive,” such as in Nigeria, which just had an election “that went our way,” and Sri Lanka, which recently voted for democracy. “Democracy is messy; it’s not linear,” she said.
Ishida added that these countries also “learn to work within” political changes.
Of the two key risks, political and currency, political is short term, noted Pradipta Chakrabortty, portfolio manager with Harding Loevner.
“Political risk peaks right before election time,” he noted. “By and large, if the political risk and upheavals do create an opportunity, we gladly take positions in companies [in frontier markets] because of cheaper valuation. We actually like the fact that there are upheavals, which are political in nature and don’t affect the underlying fundamentals” of the companies. He added that “the headlines you see are not really material from an investment point of view. These companies in frontier countries have learned to live and survive and prosper in these environments. They are good at managing risk.”
