Baring Asset Management (Barings) announced its plan to launch the Baring Frontier Markets Fund in the coming weeks, subject to regulatory approval.
The fund, which will be managed by Investment Manager Michael Levy and supported by Barings Head of EMEA Dr. Ghadir Abu Leil-Cooper, will seek to achieve long-term capital growth through at least 70% exposure to frontier markets.
The managers will use a combination of top-down analysis of the political and economic factors affecting each country and industry, together with a disciplined, bottom-up stock selection process to seek strong investment returns in markets that fall outside developed or emerging market benchmarks. Examples of frontier markets include Nigeria, Saudi Arabia, the UAE, Sri Lanka and the Ukraine.
Barings believes frontier markets offer the potential for strong long-term growth, in a low-growth world. Low correlation with both emerging and developed markets, as well as low intra-country correlation, means that frontier markets also offer diversification benefits.
GDP rates in most frontier economies are forecast to outpace more developed economies for the foreseeable future. Many frontier economies have young, growing populations and a strong base for domestic demand and labour. There tends to be a deep under-penetration of consumer goods and services, providing an opportunity for growth as wealth creation and distribution advances. The natural resource base is often vast and underutilised, from agricultural land, to oil and gas reserves and mineral resources. For example, even without the inclusion of Saudi Arabia, frontier markets hold 30% of global oil resources; most of which are largely untapped. All of these factors, Barings believes, equate to drivers for sustainable growth, underpinned by strong foreign direct investment trends and generally low levels of government debt.
Frontiers are markets at an early stage of development and as such they have traditionally carried higher governance risk. However, Barings believes there has been a tangible change in policy mix across these countries where, for example, democratisation has a chance of taking root in the Middle East following the Arab Spring, and there has been a general trend away from autocratic to democratic regimes in Africa.
Barings Investment Manager Michael Levy commented: “Over the last 20 years, the free-float market capitalisation of core emerging markets (MSCI Emerging Markets) has increased 25-fold and we believe that frontier markets are now positioned where emerging markets were 20 years ago, poised to become the next big opportunity in the coming years. We believe these markets are widely mispriced and hold undiscovered investment opportunities.”
“A disciplined stock selection process is absolutely essential as frontier markets are not homogenous, are very diverse in terms of characteristics and differ widely in terms of resource availability, wealth, productivity levels, and institutional and social development,” Levy said.
“We strongly believe there are outstanding investment opportunities in these dynamic economies. Equity markets are at an early stage of development, providing many mispriced investment opportunities. We believe that Barings has the right investment approach and a track record of investing in emerging and frontier markets that shows we understand and can capitalise on the opportunities,” he added.
The investment process behind the Barings frontier markets fund will draw on the company’s extensive experience of investing in emerging and frontier markets at an early stage. Barings was one of the earliest investors in China, early in Latin America and was there when the Berlin Wall came down to bring Eastern Europe and Russia to its clients. More recently, the US$ 553 million Barings ASEAN Frontiers Fund and strongly performing Baring MENA Fund have offered new ways of accessing frontier markets in Asia, the Middle East and North Africa.
The Barings frontier markets fund will be a UCITS fund, domiciled in Ireland. The minimum investment for the retail share class is £2,500 with an annual management fee of 2%. A share class for institutional investors is also available.