Page 1 of 2 Just as emerging markets dominated headlines in 2009, resource-rich frontier markets are quickly becoming "the" hot investment for 2010. Investors have flocked to these small, notoriously illiquid economies, seeking to get into the next China or Brazil at the ground floor. But with so much hype and misinformation surrounding the space, how can investors avoid getting burned? Who better to ask than famed emerging and frontier market experts Mark Mobius? Known for his extensive expertise on international markets, Mobius was fund manager for the U.S.' first ever emerging markets equity fund, the Templeton Emerging Markets Fund. Today, he serves as the executive chairman of Templeton Asset Management, where he manages more than 35 funds. Recently, HAI associate editor Lara Crigger caught up with Mobius about the case for investing in frontier markets, including what makes a good frontier market, what connection they have to commodities, and why frontier markets offer lower volatility than many developed markets—including the U.S. Crigger: So why should investors consider adding frontier markets to their portfolio? What's the appeal of these tiny, illiquid economies? Mobius: The first and foremost appeal is the valuation. In these markets, we're able to find cheaper stocks that are significantly better valued than those in normal emerging markets. That's not true of every single company, of course, but it's certainly true of many. Of course, the reason why these frontier markets tend to be cheaper is because they have not yet been fully discovered by investors. They tend to be under-researched, and not so readily available to normal investors. Crigger: What do frontier markets offer investors that emerging markets don't? Mobius: Well, frontier markets are really just a subset of emerging markets. In the future, we expect these frontier markets—at least some of them—to become quite important, and to even become full-fledged emerging markets or greater. When we started the very first emerging markets fund in 1987, at that time, it was impossible to find markets that were liquid and researched. So in some ways, we're returning back to where we were at that time. Crigger: Many frontier markets are very resource-rich. Do frontier markets make a good commodities play? Mobius: The commodities arena is really very wide, and it includes normal emerging markets as well as frontier markets. In fact, I would say that one of the attractions of frontier markets is not only that they're in the commodities arena, but that they're also an opportunity to get into the consumer arena more easily. When you look at disposable consumer goods, the large multinationals are usually the first in. They buy up the large companies that are established brands, and very often these companies don't find their way into the equity markets. In the frontier area, there are more of these available. Crigger: When investors look at a frontier market, what criteria should they use to evaluate whether it's a good investment or not? Mobius: We use the same criteria that we would use for any market in the world. First and foremost is the balance sheet. We look at whether the company is faithful, in terms of its balance sheet. Then we look at earnings and earnings potential. And most importantly, we look at management. In emerging markets and frontier markets alike, the management capability is extremely important. You've got to get managers who are capable of managing in challenging environments. Of course, there is one challenge that we get in these markets, and that is the custodial situation. We need a custodian bank who can safeguard our assets, look after dividend collection and so forth. That becomes a challenge in frontier markets. And at Templeton, we're actually pioneers in that area.
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