The fund will be benchmarked against the MSCI Frontier Markets Index, which has around 60% in the Middle East. Conway and Sidani will employ a similar process to that used across the group’s emerging market range. The pair will be supported by analysts based in Dubai, Europe, Latin America and Asia.
Conway, head of emerging market equities at Schroders, says that as investors risk appetite increases they are increasingly seeking to establish a strategic allocation to emerging markets rather than using them tactically. He thinks this will lead to a greater focus on the frontier markets.
Frontier markets have performed well in 2010, with the MSCI Frontier market index rising 19.6%, compared to a gain of 11.10% for the wider MSCI Emerging market index. However, they still lag on a three and five year basis. The frontier market index is down 15.25% over 3 years, compared to a fall of just 1.28% for the equivalent emerging market index.
Schroders says that there remains a strong rationale for investing in frontier markets. They have a combined nominal GDP of US$2.4 trillion (3.9% of global GDP), second only to China, and comprise 12% of the world’s population, of which almost 60% is under 30 years of age. Labour costs are extremely competitive and natural resources abundant.
In general frontier markets are under-owned by global investors, market liberalisation is accelerating and valuations are currently attractive. They can also offer diversification benefits, as they tend to be less correlated with global equity markets.