Aberdeen Frontier Markets unit trust is currently the group's fifth most popular fund among IFAs in ...
Aberdeen Frontier Markets unit trust is currently the group's fifth most popular fund among IFAs in terms of new sales. The £56.5m portfolio is managed by Andrew Elder and it is the best performing emerging markets unit trust over three years, according to Micropal. During the 36 months to 19 April it rose by 48.2% on an offer to bid basis compared to an average fall of 5.2%.
Elder talks to James Thorneley about how he manages the fund and particularly why European convergence is crucial to his investment approach.
Over three years the Frontiers fund has significantly outperforming its Micropal peer group. How do you explain this? Is it anything to do with the limitations on your investment universe?
It is probably best to explain the remit of the fund. We can invest in the markets of eastern Europe, south east Europe, the Middle East and North Africa and sub-Saharan Africa. We effectively benchmark ourselves against the MSCI EMEA index, so we cannot invest in Latin America or Asia. It is a regional fund. Whether we do better than Latin America or Asia is often to do with whether those markets are performing well. So to compare a Latin America fund with a Frontier market is not really comparing like for like. Although similar dynamics affect emerging markets, in general and the risk attached to them, Frontier markets do not have a high correlation with Latin America or Asia.
We prefer to compare the fund's performance against its benchmark. Since its launch in May 1996 until 29 February 2000 the fund has risen by 142.7% on a bid to bid basis compared to an advance in the benchmark of 40.3%.
This fund is very much a focused portfolio in a specialist market. Is it too specialist for retail investors?
There are some investors who prefer to get access via a global emerging markets fund and so this obviously is not a suitable vehicle. But investors are becoming more sophisticated and those who have an Asian fund probably do not need a global emerging market portfolio because there would be a degree of overlap. Frontier Markets is for someone who wants to enjoy the benefits of what is happening around Europe but with a little bit more risk. This is a play on Europe rather than the emerging market asset class.
What is your investment philosophy?
Convergence is crucial to our approach. Although we are bottom up investors it is very important to look at what stage a market is at.
We are neither growth nor value investors. It is very difficult to be either a growth or value player because you do not have the depth of equity markets which you find in developed countries.
What do you mean by convergence?
We see two strong binding factors that link our markets the first is convergence and the second is sector trends and these two factors link the performance of the equity markets.
All the markets are converging with western Europe in three senses. Politically we saw in the late 1980s the end of communism in eastern and central Europe and the adoption of political structures similar to those which operate in western Europe.
In sub-Saharan Africa, South Africa saw the end of apartheid and the new democracy. In essence our markets were moving from totalitarianism or dictatorships to more western European models. The second one is economic convergence.
This means really the move towards free market economies and managing the economy on more of an IMF blueprint. That means deregulation, privatisation, reducing inflation towards European rates, thereby enabling interest rates to drop and reducing fiscal deficits. These are all similar to the Maastricht criteria.
The third convergence is financial. We have seen this in Greece in late 1998 and early 1999. This is effectively the move towards the adoption of the euro as an anchor. The option and prospect of adopting the euro can lead to massive equity market gains and we saw this in Greece. The reason being you take away your exchange rate risk, short term interest rates need to converge with European ones meaning long term ones will also converge. A massive reduction in interest rates will result. The prospect is that Greece will only enter the euro at the beginning of 2001 but the equity market has already discounted this. Once convergence has occurred at all three levels then the market usually leaves the index, for example Portugal.
All the countries in the index are at a different stage. South Africa is still undergoing economic convergence by way of a privatisation programme but interest rates have not yet converged with European ones.
The second driving force is sector trends. A lot of our sectors are being priced off European multiples. So we will have the Polish telecommunications, Greek telecoms, or the South African mobile operators being valued off multiples being used in Europe. This provides a linkage between our markets and western Europe and the three main sectors which this applies to are telecoms, technology and resource stocks.
So does this mean you compare the P/E of a French telecom stock to that of a Polish telecom company?
Exactly, although for telecoms analysts you often don't use the P/E but a multiple called EV-ebitda. This is enterprise value over earnings before interest tax depreciation and amortisation.
A lot of our stocks are now being covered by sector analysts who are added on to the European team whereas when I started five years ago there would be country analysts. This means analysts use the same models on developed market stocks and emerging market stocks. There used to be this big classification between emerging markets and developed markets. But emerging market analysts looking at telecom stocks, for example, are now much more influenced about what is happening in Europe rather than Chile or Bangladesh.
Surely when comparing a French telecom to a Polish telecom the Polish one will almost always b
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