Who are the best Frontier Market managers? 2017 Edition

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Who are the best Frontier Market managers? 2017 Edition

We provided an overview of active Frontier Market managers 2 years ago here.  In that analysis, the strongest active investment managers were HSBC and City of London, based on a variety of metrics.  We received a request to update this data and thought it made sense to do so with a 2-year update.

In our previous analysis, we looked at 22 Frontier Markets Funds, of those 6 have shut down, indicating that Frontier Markets remains a very challenging place to invest and raise capital.  Especially when developed markets have done so well.  The firms which no longer provide a Frontier Markets fund include:

  • Everest Capital (Firm defunct, though the lead PM did go over to RWC Partners)
  • Colonial First State
  • GlobeFlex became Salient and Salient killed the Frontier Markets strategy
  • Investec
  • Nomura (shuttered the Frontier Markets strategy in Dec 2016, only had $4mm in AUM at the time)

If Nomura can only get $4mm into Frontier Markets, clearly there is a problem.  That is the subject of a future post, but suffice it to say that management fees, transaction costs and the terrible diversification within the MSCI Frontier Markets index are all reasons for concern.

However, despite that, there are several firms that are new to the space.  We continued our investigation into who are the best Frontier Markets’ equity managers available to a high-net-worth individual or an institutional investor? There remain several hundred small players and what we would now categorize as 20 institutional-level players in the Frontier Market space, so we are down 2 since our last update.  Some of these are quite small, but given the institutions behind them, they could scale overnight and still be well-positioned within the marketplace.  Our analysis was conducted on a USD basis.

The list of managers we looked at:

  • Aberdeen – Frontier Markets Equity
  • Acadian – Frontier Markets Equity
  • Ashmore Group – EM Frontier Markets Equity
  • Barings – Frontier Markets Equity
  • BlackRock – Frontier Markets Fund
  • Charlemagne Capital – Global Frontier Markets Equities
  • City of London – The Frontier Markets Emerging Market Fund
  • Consilium – Frontier Equity Strategy[1]
  • Franklin Templeton – Templeton Frontier Markets Equity
  • Herding Loevner – Frontier Markets Equity
  • HSBC Global Asset Management – Frontier Markets equity
  • BMO LGM – Frontier Markets Equities
  • Morgan Stanley – Frontier Emerging Markets Equity
  • Russell – RTC Frontier Markets Fund
  • Schroders – Frontier Markets Equity
  • Intereffekt Investment Funds Global Frontier High Dividend Equity
  • Somerset Frontier Markets Fund
  • Rowe Price Frontier Market Fund
  • Silk Invest – Silk Road Frontiers
  • Silk Invest – Global Frontier Fund
  • Driehaus – Frontier Emerging Markets Fund

We looked at firm stability, 1-5 year returns, standard deviation, Sharpe ratio, upside capture, downside capture, firm stability, and approach.  On that basis, the following managers’ performance warrants closer scrutiny.

  • Acadian – Frontier Markets Equity (Acadian)
  • BlackRock – Frontier Markets Fund (BlackRock)
  • Charlemagne Capital – Global Frontier Markets Equities (Charlemagne)
  • City of London – The Frontier Markets Emerging Market Fund (London)
  • HSBC Global Asset Management – Frontier Markets equity (HSBC)
  • Morgan Stanley – Frontier Emerging Markets Equity (MS)
  • Schroders – Frontier Markets Equity (Schroders)

Please see the quartile chart below for a representation of each manager’s performance over the past five years.

Table 1: Quartile return chart for Frontier Markets Managers

The past year resulted in the exceptionally strong performance of all most active managers.  Things have changed in the last two years, with the benchmark underperforming most managers over the 5-year period as well.  The strong outperformance by managers such as BlackRock and Charlemagne over the past year have resulted in stronger numbers for both over the trailing 3-year and 5-year period as well.

The managers we have covered are relatively large, and it must be said, that the best advantage in Frontier Markets’ investing is having a small portfolio for all the illiquid names in the Frontier.  The AUM, average fees, and minimum account size are provided in the table below:

Manager

Fees AUM ($mm) Minimum Account Size ($mm)

Acadian

150bps 736 5

BlackRock

110bps 339

1

Charlemagne

120bps 433 1
London 130bps 48

5

HSBC 125bps 405

1

Schroders 150bps 1,213

1

These fees are for the minimum invested amounts.  Those investors with substantially higher levels of investments would pay substantially less.  Fund administration costs are not included as well.  BlackRock has a clear advantage here, due to its scale.  It can charge a lot less both in management fees and administration fees.

In aggregate, we looked at each of the six managers listed above on a weighted basis, providing more weighting to 5-year and 3-year returns.  We looked at quantitative metrics, holdings data, manager stability, firm stability, and fees.  On that basis, we believe that the three managers below would make excellent investment options for any institutional or high-net-worth investor looking to invest in Frontier Markets.

  • BlackRock
  • City of London
  • Charlemagne Capital (Fiera)

What is worth noting is that City of London was also considered to be one of the strongest investment managers in our prior analysis.  They have certainly exhibited consistency but a terrible ability to attract investments.  Charlemagne was acquired by National Bank of Canada last year, providing it with strong backing for future fundraising.  Of the top 6 that we looked at, only City of London stands out as being unable to raise a reasonable amount of fees.

As always, please consult your financial advisor or investment consultant for issues specifically related to your situation.  If you have any questions please let us know.

[1] We did not get performance information for Consilium, so analysis for the firm was restricted to AUM, fees, and investment style, firm stability

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