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David Kempton: my adventurous frontier market investments

Citywire's travelling investment columnist has bought some high risk funds targeting fast-growing frontier markets.

 
David Kempton: my adventurous frontier market investments

Having visited some remote bits of Africa and Asia last year and recently returned from the South African Indaba Mining conference and platinum mines in the north of the country, it might not come as a surprise that my largest recent investments have been in frontier markets. 

Before you dismiss such investments as too high risk, consider some of the facts:

1. Of the 20 world’s fastest growing economies in 2013-17, according to International Monetary Fund forecasts, 12 are in Africa and the Middle East and eight in Asia.  Developed markets don’t feature.

2. Less volatility and very low correlation with developed markets make them an interesting useful alternative investment.

3. Compliance and statistics have improved markedly and are often easier to collate than those from some more developed regions.  Consider the figures, on which we make judgments, coming from the massive and diverse regions of China, India and Indonesia.  How accurate do you think these monthly figures really are?

4.Bloomberg data shows that the 25 nations in frontier market funds gained 24% last year against US funds’ returns of 14%, 16% for Japan and Emerging Markets and 17% for Europe.

5. Emerging markets have mostly emerged and many now have issues impeding future growth.  The MSCI frontier index has a P/E of 11.6, 27% lower than the MSCI All-Country, with a 3.6% yield and projected 17% growth. 

6. Having worked and travelled in these regions constantly for over 30 years, I have been impressed this last year in the enthusiasm for education, and betterment.  It is extraordinary to see a remote jungle village with a wind turbine or a solar panel producing a bit of electricity, hence pumping water, but also powering a mobile phone and computer. Corruption is however still a big issue.

    7. Children are keen to learn and teach their parents literacy. It is the best beneficial viral growth for information technology that one could imagine.

      8. There is a move off the land and into the cities, buying food in shopping malls and getting the dreaded consumer habit, instead of subsistence farming in the villages.  Consumer markets are growing very fast and corporate earnings grow with it.  The 1 billion people of Africa have some of the highest population and urbanization growth in the world.

      How to invest

      So where do you invest to take advantage of these trends?  As ever it is a question of considering the best funds, your risk profile, the regions covered and the ease of trading.

      I have bought the following investment trusts:

      Advance Frontier Investment Trust

      • One year performance: 16%
      • Three year performance: 26%
      • Currently discount: 14%

      Blackrock Frontiers Investment Trust

      • One year performance: 27%
      • There is no three year figure available as the trust was started in December 2010 Current discount: 3%

      Genesis Emerging Markets Fund

      • One year performance: 15%
      • Three year performance: 39%
      • Currently discount: 4%

      These are all closed end investment trusts, which suit me, but it is also worth considering frontier funds run by Templeton, Investec and Ashmore.

      I have recently come across the Arisaig Funds, based in Singapore.  They run total assets of $4.5 billion across three Funds which are invested exclusively in consumer quoted stocks, where they see the best sustainable growth in developing economies. 

      Their approach has been astonishingly successful:

      Arisaig Asia Consumer Fund

      • Size: $3.1 billion
      • One year performance: 31%
      • Three year performance: 103%

      Arisaig Africa Consumer Fund

      • Size: $770 million
      • One year performance: 42%
      • Three year performance:  83%

      Arisaig Latin America Consumer Fund

      • Size: $493 million
      • One year performance: 30% (launched in November 2010)

      The Arisaig Funds are not for everybody with a minimum purchase of $100,000, but with such performances a broker might consider grouping some clients together.

      The Africa fund is currently cheapest on a 21 P/E, yielding 3.3%, but you need courage to buy it after such a storming recent performance.

      Risky, but real

      Whether you agree these views here or still consider these markets a risky distraction from the main events, the growth is demonstrably real – just look at the performance of these funds. 

      The gains in these markets seem unstoppable and in my decades of working life I have not experienced such growth in these regions; but why? 

      The difference, of course, is the ubiquitous cheap efficient availability of information technology and internet access with the powerful desire for education and communication, coming to a wonderfully irrepressible youth. 

      We’ve never seen anything like that before.  

      David Kempton is an experienced investor, proprietor of Kempton Holdings and a non-executive director of a number of quoted and private companies.

      6 comments so far. Why not have your say?

      david brown

      Feb 25, 2013 at 14:00

      After having my 'fingers' burnt with New Star (?) Heart of Africa I am wary about many of thes funds.

      report this

      seahound

      Feb 25, 2013 at 14:52

      Hi David,very interesting article as always.

      You say very low correlation to developed markets.

      My feelings are if & when things turn ugly in the west they will have

      a very high correlation on the downside.

      report this

      TJL

      Feb 25, 2013 at 18:52

      Thank you for this article.

      I have been tempted for a while by frontier markets and think I might take the plunge - on a modest (I mean proportionate) scale.

      One question, does Advance FM not invest in Blackrock FM (as well as others)?

      report this

      gravedigger

      Mar 02, 2013 at 11:19

      Emerging markets are high return/high risk. The possibility of major damage to investments by fraud in China and Indonesia, Nationalisation in South America, violent trade union activity in Africa and government interference in India make betting on horses (not the burger type) a realistic alternative.

      report this

      Ines

      Mar 02, 2013 at 14:00

      It is perhaps a mistake to combine investing in all frontier markets at once, some are safer to invest in than others. The area that interests me at the moment is Singapore/Malaysia/Thailand. Aberdeen New Thai IT has done really well for example. It seems there are big infrastructure investments going on between these countries too. It would be helpful to have some comment on this area. The Phillipines also look interesting. Anyone got any personal insights?

      report this

      John de Montfort

      Mar 03, 2013 at 12:26

      I have just returned from an audit vist to East Africa, after not being there for twenty years. My anecdotal evidence would definitely give support to the tone of this article. In telecommunications and payment systems, Kenya is showing an ability to leap frog the west in terms of customer service. There is also a noticeable availablity and demand for high quality consumer goods.

      report this

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