Frontier vs emerging risks
Investors tend to perceive comparatively undeveloped frontier markets as more risky than emerging markets, but Teverson believes otherwise.
“When we drill down to the level of individual companies, we find a number of frontier market companies that we do not believe are riskier than their emerging market counterparts.”
An important element in assessing the risk of any potential investment is governance, he said, adding that there are management teams in frontier companies that are well-aligned with minority shareholders.
In addition, the risks in frontier and emerging markets are different.
For example, concerns over trade tensions coming from the US will mostly affect the large emerging markets, such as China. However, frontier markets, such as Nigeria and Kenya, are relatively unaffected because they are more focused on their domestic economies.
Debt-to-GDP also tends to be lower in frontier markets than in EM, he added.
Due to the differences in risk, Teverson sees frontier market exposure as a diversifier in a portfolio.
“Correlations can be low between frontier markets and the large emerging markets,” he said, adding that the correlations of a number of frontier market stocks are less than 0.2 with the MSCI Emerging Markets.
He acknowledged that investors should be aware of country-specific risks. For example, Nigeria is vulnerable to oil price changes.
“Oil prices are clearly a risk, but it is important to point out that Nigeria’s vulnerability to oil price is not as high as it has been in the past,” he said. The government has taken steps to diversify the economy away from oil dependence. In addition, the low oil prices in 2016 has led banks to be cautious about how much they lend to the energy sector.
The liquidity problem
Liquidity has been the most cited risk in frontier markets. Mobius, for example, previously cited liquidity as one of his primary concerns.
“Many of these markets are small, so you can have problems getting in and out if you are invested. You’ve got to take a long-term view,” Mobius said.
Teverson said liquidity is a challenge for investors who want to build a pure frontier market fund. However, if managers allocate a small portion of their assets to frontier markets, liquidity is less of an issue, he believes.
“There are a number of liquid stocks in frontier markets. So if what we are looking to do is incorporate frontier exposure in an emerging market fund, then liquidity is not a challenge at all.”
The firm’s Global Emerging Markets Equity Unconstrained Fund, which Teverson manages, has around 10% of its assets in frontier markets, he said.
Among the top ten holdings, Nigeria’s Guaranty Trust Bank and Kenya Commercial Bank each account for 2.9% of the portfolio.
The three-year performance of the Jupiter Global Emerging Markets Equity Unconstrained Fund versus its benchmark index
