Mobius Shuts Frontier Fund to New Investors on Record Inflow
Templeton Emerging Markets Group closed its fund that invests in the least-developed markets to new money, as record cash inflows turn stock indexes from Dubai to Argentina into the world’s best performers this year.
“The money was coming in too fast,” Mark Mobius, the executive chairman of Templeton Emerging Markets Group, which manages $53 billion, said in a phone interview from Dubai on Sept. 23. “But the market is still very buoyant and the opportunity longer term is still very, very good.”
Funds that buy shares in frontier countries, which have an average market capitalization of $36 billion, recorded $3.24 billion of inflows this year through Sept. 19, according to EPFR Global. The Templeton Frontier Markets Fund (TFMAX) was closed to new investors at the end of June while existing shareholders can still add money, Templeton said in an e-mailed statement today.
Growing corporate profits, dividends and current-account surpluses have made frontier countries resilient to investor concern that the U.S. Federal Reserve will reduce monetary stimulus. While low trading volumes in these smaller markets mean higher transaction costs, the MSCI Frontier Markets Index has jumped 13 percent this year, versus a 4.6 percent drop in the MSCI Emerging Markets Index.
Frontier nations accounted for six of the seven biggest gains among global equity indexes tracked by Bloomberg this year as Dubai’s DFM General Index (DFMGI) and the MSCI Argentina Index surged more than 38 percent. The MSCI frontier gauge is poised to advance during a year of losses in the emerging index for the first time on record.
Aldar Properties PJSC, an Abu Dhabi-based real estate developer, and Dubai Financial Market, which operates the emirate’s stock exchange, both rose at least 94 percent to lead gains in the frontier index. Telecom Argentina SA’s U.S.-listed shares surged 69 percent while Lagos-based Dangote Cement Plc (DANGCEM), controlled by billionaire Aliko Dangote, jumped 48 percent.
This year’s inflow into frontier funds is more than three times bigger than the $879 million of net purchases last year and is poised to surpass the previous annual record of $3.07 billion in 2010, according to data compiled by Cambridge, Massachusetts-based EPFR Global. Emerging-market funds recorded $13.7 billion of net outflows this year through August.
“There has been an awakening among investors that the growth story in traditional emerging markets has run its course,” Sean Wilson, the chief investment officer at LR Global Partners, which oversees about $200 million, said by e-mail Sept. 20 from New York. “Frontier markets are only now being discovered by the broader investment community, and offer what traditional emerging markets offered 20 years ago.”
The U.S.-domiciled Templeton Frontier Markets Fund has returned 19 percent during the past three years, versus a 15 percent gain for the MSCI frontier markets index, according to data compiled by Bloomberg.
The fund, which managed about $2.2 billion of assets at the end of July, had its biggest holdings in Saudi Arabia and Nigeria (NGSEINDX), according to a fact sheet on Templeton’s website. Its largest industry positions were financial and telecommunications stocks.
While the least-developed equity markets have outperformed this year, they’re lagging behind in the third quarter after the Fed’s unexpected decision to maintain its $85 billion of monthly bond purchases. The frontier gauge is up 5.4 percent since the end of June, versus a 7 percent gain for the emerging measure.
Lower trading volumes in frontier markets make it costly for investors to exit their positions. Dubai’s exchange had $151 million of average daily turnover so far in 2013, compared with about $893 million for Russia’s Micex Index, according to data compiled by Bloomberg.
“Given the liquidity in the market, the booms and busts could be even stronger than you would find in emerging markets, so that adds an element of risk,” Andy Brown, a London-based money manager at Aberdeen Asset Management, which oversees about $318 billion worldwide, said by phone on Sept. 12.
Investors are piling into frontier markets because of their growth prospects, Paul Herber, who helps oversee $5.7 billion at Forward Management LLC in San Francisco, said by e-mail on Sept. 20.
Per-share earnings in the frontier measure have increased about 14 percent during the past two years even as profits in the emerging gauge dropped 11 percent, according to data compiled by Bloomberg.
The frontier measure has a 4 percent dividend yield and is valued at 12.1 times reported earnings. That compares with a 2.7 percent yield for the emerging gauge, which trades for 11.9 times profits.
Current-account surpluses in frontier countries will probably grow to an average 3.4 percent of gross domestic product this year from 3.1 percent in 2012, while emerging nations will post a deficit of about 1 percent, according to estimates from the Washington-based International Monetary Fund and data compiled by Bloomberg.
“As the asset class continues to mature, by way of more liquidity in local markets and more investable products for institutional investors, frontier-market equities will continue to attract inflows,” Tim Drinkall, a New York-based money manager at Morgan Stanley Investment Management, which oversees about $347 billion, wrote in a Sept. 23 e-mail. “We expect them to continue to outperform.”