Hello and welcome to Morningstar series, "Why Should I Invest With You?" I am Emma Wall
and I am joined today by Michael Levy, Manager of Baring Frontier Markets Fund.
Hello Michael.
Good morning.
So, your fund went great guns last year for about two-thirds of the year and then there
has been a sell off both in the fund and in the benchmark. What caused that?
In Q4 of 2014 we certainly saw a correction in frontier markets. In the fourth quarter
the markets were down about 12.5%in U.S. dollar terms. I think there's a variety of facts
that caused the correction. Oil prices were certainly influential and the fall in the
oil price had an impact on some of large frontier markets like Nigeria, Kuwait and Kazakhstan.
Additionally, localized political factors also had an impact.
So, for example, in Bangladesh there were some strikes organized by the opposition,
some of these were violent strikes and had a negative impact on investor sentiment. In
the South China Sea there was tension between China and its neighbors like Vietnam. That
also impact investor sentiment in Vietnam. So, there were a variety of factors that caused
the sell-off. But ultimately, I think the markets in frontier markets are really consolidating
after a strong period of returns. 2013 and 2014 were both very strong years. So it's
natural for markets to consolidate. Additionally, some of the inflows into frontier market started
to stem off as uncertainty surrounding the U.S. rate cycle caused investors to maybe
momentarily reduce or stop asset allocation shifts.
Of course, the thing about frontier market is, we have to be able to storm volatility.
It's not just going to be a slow and steady smooth ride. It's going to be periods of fantastic
rallies and then periods where there are little corrections because these markets do have
these political risks associated as you mentioned. So, then I suppose the question is, as a fund
manager do you stick to the stocks in your basket knowing that the fundamentals are strong
or when you do have this sort of backdrop, do you make corrections because the oil price
thing may go on for some time?
Firstly, on the point of volatility, I think it's true to say that individual frontier
markets can be volatile by nature, they are frontier markets. But the overall asset class
volatility historically has not been very high compared to, for example, emerging markets
and the return volatility trade off in frontier markets has actually been more favorable than
it has been for emerging markets. So part of that is down to the fact that frontier
markets are very, very diversified. They are very heterogeneous and intra-country correlation
is low. So, as a result, frontier markets are a fantastic source of diversification
for investors.
In terms of how we deal with volatility. The way we invest at Baring is we invest in high-quality
companies that have long-term structural growth opportunities where there is lots upside.
So we typically use any volatility to adjust position sizes in portfolios. But we have
a medium to long-term outlook for our stocks and we just use price action to maximize opportunities.
Talking about those opportunities then, you've got about – you've got a good chunk of the
fund in Africa stocks, you've got a good chunk in the Middle East. But I know you've been
moving out of the Middle East into Asia. Perhaps, you could talk about the opportunities there.
Certainly, all our moves in the portfolio are driven by bottom-up factors. Whilst we
look at macroeconomic and political cycles, really what drives our decision are bottom-up
stock-specific factors. So, we've really been finding better opportunities in the Asian
markets and I can give you a few examples. So, for example, in Bangladesh, there is bank
called BRAC Bank, which is an SME lender. There is a lot of growth in the SME lending
market as one could imagine because of the under penetration. But what's exciting about
BRAC Bank is it has Bangladesh's leading mobile money platform called bKash. In frontier markets
mobile money is a huge theme. People don't have bank accounts but they have mobile phones.
So in Bangladesh 75% of the population has a mobile phone only 20% of the population
has a bank account. So the way people transact and become economically and financially inclusive
is by using mobile money transfer.
We're only just getting this in the U.K. So they are streets ahead of us.
They are streets ahead and Kenya has actually set the world ahead. It is the market leader
in the globe. But Bangladesh is catching up rapidly. So, if you look at Bangladesh, in
2012 0.7% of the GDP was transacted on a mobile platform. By the end of 2015 we expect about
10% of GDP to be transacted on a mobile platform. So, it's a huge growth opportunity and bKash
has a leading market share. It has around 60% to 70% market share. It has the best network,
the best brand. So, we expect that to be a great model to exploit, this trend and this
opportunity.
You did mention there earlier that 2013 and most of 2014 were extremely positive for frontier
markets. Going forward now that we've had this split can we expect the same or is it
difficult to tell?
Look, it's always difficult to give short-term forecasts for market directions, but our belief
is that frontier markets in the medium to long-term are an incredible exciting opportunity,
probably one of the best opportunities in public equities. They not only give you diversification,
they give you currently pretty cheap valuations. Frontier markets are trading on a forward
P/E of around 9 times, which is far, far lower than emerging and developed markets.
We're seeing political reform in frontier markets. Whilst there are political issues,
there's very strong reform agendas in markets like Pakistan, Nigeria, Sri Lanka. On top
of that, and ultimately why we want to invest in frontier markets is growth and there are
fantastic structural growth opportunities in frontier markets. I mentioned mobile money
transfers, but it's also true in education, in healthcare, in the consumer space we're
finding a plethora of stock-specific opportunities that we think will be long-term winners. So
we have a very optimistic view of frontier markets.
Michael, thank you very much.
My pleasure.
This is Emma Wall for Morningstar. Thank you for watching.