FUNDS: To boldly go

By bne IntelliNews December 5, 2014

Nicholas Watson in Prague -


Over the past two years it has become much more rewarding to invest in frontier markets – the next generation of emerging markets, spanning Asia through the Middle East and Africa, to Europe and Latin America – than traditional emerging markets. Consequently, Swedish investment company East Capital plans to create a new fund focusing on global frontier markets, with the launch slated for mid-December.

East Capital already manages around $450mn in regional frontier assets, drawing on what it says is its longstanding track record and experience working in such markets. "We have almost two decades of expertise in frontier markets such as the Balkans, the Baltics, Central Asia and have also entered Asian frontier markets more recently,” says Peter Elam Håkansson, chairman of East Capital, who is personally heading the Frontier Markets team. “Not only is this asset class very attractive, but more importantly our investment strategy based on fundamental research and stock picking is proven and works well.”

East Capital points to its investments in the Balkans as an example of what frontier markets can offer. Many of the countries in its East Capital Balkan Fund, which in September won the "bne Best Equity Fund 2014" with an annual return of 26%, would be eligible for inclusion in the new frontier fund. “The global frontier fund will definitely invest in four of the Balkan Fund markets: Slovenia, Croatia, Romania and Serbia. And we will consider Bosnia, Bulgaria, Macedonia and Montenegro – not in a major way, but we a have a track record in all these,” says Tim Umberger, senior advisor at East Capital, who is involved in both the Balkan and frontier funds.


What has enabled the Balkan Fund to flourish this year, up 23.7% over the first 10 months, is also what sets other frontier markets apart, which is that to a large extent they are uncorrelated with the main global markets because they are driven by their own dynamics, says Umberger.

While the International Monetary Fund was in October warning of “stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets”, the MSCI Frontier Markets Index – which includes large and mid cap stocks from 24 frontier market countries – was up 17.05% over the first 10 months of the year. Compare that with the MSCI Emerging Markets Index, which was up just 3.63% over the same period. Over a three-year timeframe, the MSCI Frontier Markets Index was at end-October up 15.73% compared with the MSCI Emerging Markets Index up just 3.24%.

“Sentiment for the Balkan markets is quite good and at the same time the outlook is positive,” says Umberger, adding that most of the economies have started to show significantly better growth numbers, which together with relatively low valuations have combined to create good conditions for the stock markets to perform. According to East Capital, frontier markets have an average price/earnings ratio of 9x, while developed markets have a P/E of 15x and emerging markets have a P/E of 11x.

Of course, Umberger notes, there are different drivers for different markets. “The main market driver in Slovenia is that there will be a lot of large privatisation deals that will bring additional revenue for the government, but also more liquidity to the stock market. In Serbia it is very low valuations that make the market appealing, while in Romania the companies are trading at a very healthy dividend yields of between 7% and 10%,” he says.

The Balkans investment story is also much more about economic convergence with Western Europe, rather than the main one for frontier markets, which is demographics, as the young and growing populations there boost economic activity. “If frontier markets were a continent, they would account for 13% of world population but only 4% of world GDP," says Håkansson.


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