Stock pickers focused on the least-developed markets are trouncing their benchmark index and producing annual returns at least seven percentage points higher than mutual fund managers around the world.
Mark Mobius’s Templeton Frontier Markets Fund and 12 peers investing in countries from Vietnam to Nigeria and Romania earned an average 24 percent last year, topping the 8.4 percent gain in the MSCI Frontier Markets Index. They beat the Standard & Poor’s 500 Index, the Stoxx Europe 600 Index, the Topix Index and the MSCI Emerging Markets Index even as funds in the U.S., Europe, Japan and emerging markets trailed the benchmark gauges.
The winners are traveling to nations that most money managers avoid, taking advantage of scarce information to buy undervalued stocks. Investments in companies such as Nairobi- based East African Breweries Ltd. and Nigeria’s Access Bank Plc delivered higher returns with lower volatility than developed- market counterparts more than 50 times their size, including Anheuser-Busch InBev NV and Bank of America Corp.
“The companies are overlooked and under-owned,” Carlos von Hardenberg, an Istanbul-based money manager at Franklin Templeton Investments who helped Mobius post a 24 percent gain in the firm’s $1.3 billion frontier fund last year, said in a Jan. 16 phone interview. “Markets are far less efficient.”
Frontier funds’ 24 percent average return last year compares with 14 percent for U.S. funds, 16 percent in both Japan and emerging markets, and 17 percent in Europe, according to data compiled by Bloomberg.
MSCI Inc.’s frontier gauge, comprised of 141 stocks with an average market value of $3 billion, climbed 7.5 percent last month, including dividends, and reached the highest level since August 2011 on Jan. 31. The MSCI All-Country World Index of shares in developed and emerging countries is up 4.6 percent in 2013, following a 17 percent gain last year.
Nigeria’s All-Share Index rose 0.6 percent as of 10:39 a.m. in London, while Romania’s BET Index climbed 2.1 percent and Vietnam’s VN Index increased 0.8 percent.
While advanced-nation fund managers are beating benchmark indexes in January as the six-year lockstep moves in stocks break down, frontier investors may outperform in 2013 because the shares are undervalued versus bigger markets, according to New York-based BlackRock Inc., which oversees $3.8 trillion.
The world’s biggest asset manager is “much more positive” on frontier countries than emerging nations, Sam Vecht, whose BlackRock Frontiers Investment Trust Plc returned 21 percent in dollar terms last year, said in a Jan. 18 phone interview.
The MSCI frontier index is valued at 11.6 times reported profits, a 27 percent discount to the MSCI All-Country index, after trading at a premium as recently as June 2011, data compiled by Bloomberg show. The frontier index’s dividend yield of about 3.6 percent and its projected earnings growth of 17 percent are both about one percentage point higher than the emerging-market gauge.
Consumer spending in frontier nations will climb 9.2 percent on average this year, faster than the 8.3 percent pace in emerging markets, according to Euromonitor International, a consumer research firm.
Smaller price swings and lower correlations in frontier countries appeal to investors looking for returns less tied to fluctuations in global markets, said Rami Sidani, a money manager at Schroder Investment Management in Dubai.