This follows the soft-closure of the $2.2bn Templeton Frontier Markets fund this summer and leaves investors very few funds to choose from, none of which have managed to beat the frontier markets index this year.
With more than 20 per cent of IFAs saying they will increase their clients’ exposure to frontier markets, it raises the question whether investors are getting ahead of themselves in the rush in to this high-risk area.
Frontier markets are in vogue thanks to the poor performance of the emerging markets over the past three years, which has left many investors looking for alternatives.
The MSCI Emerging Markets index has made just 10.84 per cent over three years, according to data from FE Analytics, while they suffered a major sell-off in June as the market anticipated that the Federal Reserve’s quantitative easing programme would be coming to an end.
Performance of indices over 3yrs
Source: FE Analytics
The MSCI Frontier Markets index has performed only marginally better over that time, returning 19 per cent.
However, over the past year the index has raced away, making 22.94 per cent while the MSCI Emerging Markets index has made just 7.55 per cent.
Performance of indices over 1yr
Source: FE Analytics
This is a short period of time, but many investors are convinced that the strengthening of the dollar that is expected to accompany a US recovery and a withdrawal of QE will see emerging markets underperform in the near future.
Research published last week by CrossBorder Capital suggests that frontier markets are more correlated with the US business cycle, and emerging markets more with the Chinese business cycle.
A survey of 115 IFAs carried out by Barings shows that 21 per cent expect to increase their weighting to frontier markets over the next year.
However, there is a serious question-mark over the availability of suitable funds.
The £105m BlackRock Frontiers IT, run by Sam Vecht, has been the best-performing portfolio in the current surge, making 43.69 per cent in share price terms. This is well ahead of the 22.94 per cent made by the MSCI Frontier Markets index and the 29.48 per cent made by the next-best portfolio, the closed-ended Advance Frontier Markets fund.
Performance of funds vs index over 1yr
Source: FE Analytics
In NAV terms, the trust has made 35.9 per cent, with the remainder of the returns accounted for by the trust moving on to a premium.
Tom Tuite Dalton, analyst at Oriel Securities, says that it is too expensive at the current price.
"We like the way the trust operates and believe that generating income and capital growth from relatively undervalued frontier market equities is both a compelling investment proposition as well as being ideally suited to the closed-ended structure."
"We also think that the management team is strong and this is reflected in its performance relative to its benchmark."
"However, when we initiated coverage of BRFI last December, the shares stood at 83p and were trading on a 4 per cent discount to cumulative income NAV."
"The shares have subsequently risen 36 per cent and paid out dividends of 3.45p, (including special of 2.17p)."
"Given that sort of short-term return, alongside the rich 8 per cent premium, we view the shares as being fully up with events and recommend taking some well-earned profits."
The only other closed-ended option is the £90.2m Advance Frontier Markets, which is still on a discount of 7.6 per cent.
The trust has made marginally less than the benchmark over the past year in NAV terms, returning 19 per cent, although the narrowing discount has pushed it ahead of the index.
In the open-ended space, the most popular option was Dr Mark Mobius’ Templeton Frontier Markets fund until it was soft-closed this year.
It has returned less than the benchmark over one and three years, however, making 18.45 per cent over the past 12 months and 13.99 per cent over three years, in which time the index has made 18.88 per cent.
Neptune launched a frontier markets fund last December, but it has severely underperformed the benchmark so far, making just 1.7 per cent.
Performance of fund vs index since 20 Dec 2012
Source: FE Analytics
The Irish-domiciled Charlemagne Magna New Frontiers fund is only £13m in size, too small for many IFAs to consider, but it has kept pace with the benchmark over one year, making 21.57 per cent. However, it has lost 6.59 per cent since launch in March 2011 while the index has made 14.21 per cent.
Chase de Vere’s Patrick Connolly says he is concerned that the rush to frontier markets has not been well thought-through. The new money going into the sector could be difficult to manage, he warns, and could create more problems for investors in the few funds available.
"People often get ahead of themselves in investment," he said. "We are not increasing our exposure to frontier markets; most of our clients will have zero, other than a small allocation through broad-based emerging market funds."
"Our biggest concern is liquidity, and if frontier markets attract more money, liquidity issues intensify, so there’s a danger they will become a victim of their own success."
"There are very few markets with real liquidity in frontier markets, and one huge danger is that if frontier markets become more popular, liquidity issues will intensify, and we don’t want our clients to be any part of that."
