Frontier Markets in Focus
Countries where information and technology are comparatively scarce and investor-shoppers are few and far between intrigue some investment managers with a disciplined approach and willingness to dig deep in their research.
Inefficiencies in valuations and low correlation with developed and even emerging markets offer portfolio diversification and a potential income stream, a coveted attribute amid low fixed-income yields.
Dafydd Lewis, CFA, an investment analyst with Lloyd George Management, a unit of BMO Global Asset Management, built a strategic case at this week’s Milwaukee-based 5th Annual Make A Difference Wisconsin Investment Conference.
“Frontier market equities have extremely attractive valuations and offer higher dividend yields than other major markets,” Lewis said in a release from the conference. “Less analyst coverage means companies are often under-researched,” an inefficiency that lets institutional investors tap opportunity, he said.
Lewis said Lloyd George’s frontier-market expertise is not simply a carve-out of the firm’s global emerging market strategy. The firm’s frontier market specialists led by senior portfolio manager Thomas Vester Nielsen conducted hundreds of meetings in 2012, with companies in 47 frontier market countries. This rigorous investment-selection methodology uncovered economic prospects stronger than commonly perceived in some instances, he indicated.
Frontier market countries’ economies are similar to where the BRICs were two decades ago, some market participants note. These markets, such as Egypt, Palestine, Ivory Coast, Bangladesh, Vietnam, Slovenia, and Nigeria can be highly volatile from geo-political risk, but asset managers are finding core benefits in diversification potential.
Lewis said that investors should recognize it can take longer to invest in and divest from frontier market companies due to liquidity considerations. He also cited fraud as an ongoing concern but said LGM looks for companies that use internationally recognized firms to conduct regular audits, and does its own intensive feet-on-the-ground due diligence.