Queen of the wild frontiers
Josephine Jimenez has a chunk of money to invest and she is hunting for opportunities in the usual places - Zimbabwe, Tunisia and Sri Lanka, among others. Ms Jimenez is a specialist in so-called frontier markets. She stacked up a million air miles long ago. A day after coming out of hospital for dehydration in the Philippines, she flew home to San Francisco with her eight-year-old daughter, dropped her off, changed clothes and went straight back to the airport to head to Trinidad.
The tiny island, a financial hub for the Caribbean region, is the first of 10 frontier economies she plans to visit over a two-month span. It is all part of her plan to launch a new fund focused mostly on frontier markets with US$5 million (Dh18.3m) in initial capital. Also on her itinerary are Panama, Kenya, Mauritius, Vietnam, Croatia and Romania. Ms Jimenez, a contemporary of emerging-market pioneers such as Mark Mobius of Templeton Asset Management, set up her fund, Victoria 1522, two years ago to target emerging and frontier markets.
A Philippines-born American, she named the fund after the only surviving ship of Ferdinand Magellan's western-routed voyage to the Spice Islands of modern Indonesia. In 1522, the Victoria became the first to circumnavigate the world and change global trade forever. "I'm a modern-day explorer of the new world," Ms Jimenez says. Twenty-first century jets, computers and financial globalisation have cut both the risks and the potential rewards of frontier market investing. But dwindling returns in ageing western economies, scarce natural resources and recent reminders that spectacular busts are not the preserve of the developing world are luring more US and European investors to unfamiliar lands.
The giant emerging BRIC economies of Brazil, Russia, India and China are coming of age and going mainstream. Goldman Sachs, which coined the BRIC term, reckons their economies will surpass the Group of Seven (G7) industrialised nations by 2032. That means the boat is now being pushed out further. What hasn't changed much over the centuries is that navigating what are still considered opaque and illiquid markets in politically unpredictable economies needs experienced pilots with local knowledge.
Relying on flashing screen prices, day-to-day punts, economies of scale or even company prospectuses will get you only so far. These markets are all about a keen eye, long horizons and patience. They are not for the uninitiated. "I cover around 10 countries and over half my time is spent travelling to the region," says Ayo Salami, the chief investment officer for the London-based Duet Asset Management's Duet Victoire Africa Index Fund, a sub-Saharan African index tracking fund.
"You've got to get to know these companies, you've got to know the managers and what they're doing so you don't get flustered when you see big price changes," says Mr Salami, whose funds look at companies in Botswana, Ghana, Kenya, Malawi and Nigeria. Emerging securities investment, as opposed to buying bricks-and-mortar businesses on the ground, only really goes back as far as the 1980s. In 1988, Ms Jimenez worked on setting up the first Brazilian foreign fund, buying into Brazil's then state-owned telephone monopoly Telebras when the government floated 2 per cent of the shares. The market capitalisation was $100m.
"I couldn't believe it," she says. "Very few people had landlines." After Telebras was privatised and broken into 12 regional companies in 1998, its market cap was $40 billion. "Back then, that was the frontier," Ms Jimenez says. Brazil is no longer a frontier. Frontier Markets are typically seen as the next rung below emerging economies like the BRICs, Mexico, South Korea, Turkey or South Africa.
The Frontier Markets term was coined in the 1990s by the World Bank's International Financing Corp, but index compilers such as Standard & Poor's and MSCI Barra have only launched trackable indices for them over the past three years. The national constituents of the various indices vary but typically include markets as diverse as Bahrain and Qatar, Jamaica and Trinidad and Tobago, Ukraine and Kazakhstan, Sri Lanka and Pakistan and Nigeria and Kenya. What bunches them together is that they have investable securities.
The outsize returns on offer are hard to ignore against increasingly depressed First World finance. Take, for example, a typical US stock and bond portfolio split of 60:40 - the past decade was the worst since World War Two, returning an annual average of just 1.4 per cent, Reuters calculations show. The big emerging markets, by contrast, more than doubled over the 10 years, measured by the benchmark Morgan Stanley Capital International Emerging Market Fund. Many frontiers rocketed. Ukraine's PFTS bourse exploded 900 per cent higher in dollar terms, while Romanian equities jumped six-fold.
Mr Mobius says the proportion of his funds invested in frontiers has jumped from 2 per cent to 10 per cent in the past year. "The four markets we like the most are Vietnam, Kazakhstan, Nigeria and Ukraine," he said last month. "Reason is simply valuations. We're finding the cheapest stocks in those markets, and they are growing pretty fast." Ms Jimenez's Victoria 1522 is a small boat in a sea of investment ocean liners - very typical of the sort of vessels mapping a fresh route to frontier markets in recent years, and not for casual investors. Minimum retail investment is $250,000.
It started at an inauspicious time, in October 2008, a month after Lehman Brothers' bust had sent global markets and the world economy into tailspin, and with just $5m of start-up capital from backer Bank of the Philippine Islands. Investing in a mix of 37 emerging and frontier market companies, Victoria now has $60 million under management. Dressed in a floral-patterned shirt, black slacks and trainers and toting a big backpack, Ms Jimenez does not look like the typical Wall Street investor as she heads out for meetings in Port of Spain, the capital of Trinidad and Tobago. Such trips have taken her to Peshawar in Pakistan, to Chiapas in Mexico, Siberia in Russia and the border between North and South Korea.
One of her meetings is with Madree Seebaran, a local broker, who she grills on each of the 33 companies listed on the local stock exchange. She looks at their history, earnings per share, local consumer market and other factors. She also quizzes brokers, government and bank officials about local business and an economy where energy accounts for 80 per cent of its exports. Flickering power supply during many of these interviews may have given pause for thought.
Ms Jimenez sees this sort of first-hand knowledge of a country with the highest per capita oil wealth in the region - some $215,000 compared with a little more than $5,400 in Brazil - as invaluable in assessing where and in what to invest. Frontier Markets remain a small fraction of global investment. As defined by the MSCI Barra indices, frontiers have a total market value of just $123bn. While that's up six-fold from 2003, it remains just 0.5 per cent of the $23 trillion market capitalisation of the MSCI World index.
A better comparison may be the more established emerging markets, which have jumped from about half a trillion dollars in 2003 to some $3.4 trillion this year - a leap from 4 per cent of the developed market pie to almost 13 per cent. Investment flow trackers such as EPFR Global estimate that a net $1.83bn has moved into 22 frontier equity markets over the past seven years. This compares with net inflows of more than $80bn committed by the equity funds EPFR traced to emerging markets in general over the period. The numbers may be a bit misleading, however, as they reflect a period of nearly unrivalled market boom followed by a bust that has seen huge outflows prompted by flights to safety.
They also do not include what may be one of the main ways that investors tap into frontier markets, that is almost by proxy through US or European-based companies with exposure to the frontiers, or indeed companies with operations on the ground in frontiers but with equity listings in London or New York. Andrzej Blachut, the head of emerging market equities at the Zurich-based Swiss & Global Asset Management, says he goes for companies such as the UK-based and London-listed conglomerate Lonrho, which has good business elsewhere but expansion plans in frontier markets. Lonrho's agriculture division recently bought Deere & Co and Komatsu dealerships for Mozambique.
Mr Blachut says the JB Northern Africa Fund that his team runs has seen assets under management jump in recent months. From ?40m (Dh180.4m) in November last year, they are now at ?77m. While some 25 per cent of that rise can probably be put down to capital gains, the rest comes from increasing interest from institutional investor clients. In a similar vein, Deutsche Bank has seen interest in frontier markets grow so rapidly that it has begun creating a stable of exchange-traded funds (ETFs). Listed on a developed equity market, ETFs afford investors access to more exotic bourses without the hassles of direct investing.
Published: June 5, 2010 04:00 AM