James Burns: beyond Brics - trusts for the final frontier

At the start of every year, my team and I review the previous year and study what funds and what geographic areas have performed well or badly. 2011 was dominated by concerns over the future of the eurozone.

In addition to this, there was significant uneasiness in the markets in response to the inability of US politicians to achieve agreement on the US deficit ceiling and the subsequent downgrading of US government debt by Standard & Poor’s. On top of this were concerns about China’s ability to manufacture a soft landing for its economy. 

While China warranted concern, the arguably bigger issues were very much focused on the developed world. With this in mind, the most startling observation of our review was how poorly emerging markets fared in 2011. The MSCI Emerging Markets and MSCI Frontier Markets indices were both down by almost 20% while the MSCI World Index was only down 5%.

Indeed, the vast majority of emerging and frontier markets underperformed Europe, despite the eurozone being the epicentre of last year’s global financial troubles. This proves that despite a compelling economic story, emerging and frontier markets are still viewed as a geared play on global growth and in times of financial stress, money floods out of these markets to the perceived relative safety of developed ones.

A net figure of $48 billion was withdrawn from emerging market mutual funds last year (source: Morgan Stanley, EPFR Global, Fund Flows Database as at 31 December 2011). Yet again the ‘decoupling’ story – where emerging markets break free from the influence of developed ones – that has been around for years, has failed to materialise.

Historically attractive entry point

So, where does this leave us? In my view, investors are today being given a great opportunity to invest into the compelling growth story that is the world’s developing markets at historically attractive levels.

I am not saying there will not be further hiccups along the way, but for investors with an investment horizon of more than five years, it makes sense to have money invested in the parts of the world that are growing strongly and that have no sovereign debt issues.

In my capacity as fund manager of the Smith & Williamson MM Global Investment Fund , I have been lucky enough to attend two interesting closed-end conferences this year already and, among others, I have seen presentations by the two London listed investment trusts that invest in frontier markets: Advance Frontier Markets and BlackRock Frontiers.

Both focused on the long-term prospects for their funds during their presentations, but what I found most interesting was to see how differently they go about providing access to the story.