Foreign investors hunt for opportunities in Africa frontier markets

A day after coming out of the hospital for dehydration in the Philippines, she flew home to San Francisco with her eight-year-old daughter, dropped her off, changed clothes and went straight back to the airport to head to Trinidad.

The tiny island, a financial hub for the Caribbean region, was the first of 10 frontier economies she plans to visit over a two-month span.

It is all part of her plan to launch a new fund focused mostly on frontier markets with $5 million in initial capital.

Also on her itinerary were Panama, Kenya, Mauritius, Vietnam, Croatia and Romania.

The 55-year-old Jimenez, a contemporary of emerging market pioneers such as Mark Mobius of Templeton Asset Management, set up her flagship fund Victoria 1522 two years ago with an eye on emerging and frontier markets.

A Philippines-born American, she named the fund after the only surviving ship of Ferdinand Magellan’s western-routed voyage to the ‘Spice Islands’ of modern Indonesia.

In 1522 the Victoria became the first to circumnavigate the world and change global trade forever.

“I’m a modern-day explorer of the new world,” Jimenez says.

Investors shrewd enough to have backed Vasco da Gama’s spice-seeking voyage from Europe to India in 1499 reputedly made 60 times their money.

Big risk. Eye-watering gain.

Twenty-first century jets, computers and financial globalisation have cut both the risks and the potential rewards of frontier market investing.

But dwindling returns in aging western economies, scarce natural resources and recent reminders that spectacular busts are not the preserve of the developing world are luring more US and European investors to unfamiliar lands.

The giant emerging BRIC economies of Brazil, Russia, India and China are coming of age and going mainstream— Goldman Sachs, which coined the BRIC term, reckons their economies will surpass the Group of Seven industrialised nations by 2032.

That means the boat is now being pushed out further.

But as the saying goes, don’t try this at home.

Kicking the tires

What hasn’t changed much over the centuries is that navigating what are still considered opaque and illiquid markets in politically unpredictable economies needs experienced pilots with local knowledge.

Relying on flashing screen prices, day-to-day punts, economies of scale or even company prospectuses will get you only so far.

These markets are all about a keen eye, long horizons and patience. They are not for the uninitiated.

“I cover around 10 countries and over half my time is spent travelling to the region,” said Ayo Salami, chief investment officer for London-based Duet Asset Management’s Duet Victoire Africa Index Fund, a sub-Saharan African index tracking fund.

“You’ve got to get to know these companies, you’ve got to know the managers and what they’re doing so you don’t get flustered when you see big price changes,” said the 46-year-old Salami, whose funds looks at companies in Botswana, Ghana, Kenya, Malawi and Nigeria.

Since 1998, the annual return for Sub Saharan African equities is nine per cent, he said.

A lean man who stands 6 foot 2 inches tall, Salami was born in Nigeria and trained as a chartered accountant before moving into emerging markets at Nomura International in 1998.

He recalls how hard it was the following year for him to set up meetings in London for officials from the Nigerian arm of a major multinational company to showcase opportunities in the giant west African oil-producing country.

“Nobody would see them. I thought we would get them four days of meetings with some pension funds. But absolutely nobody would see them,” Salami said. “I finally ended up with two meetings after pleading with two very good friends.”

Now, he said, a conference on Nigeria will draw 200 to 300 fund managers.

Child of the 80s

Emerging markets securities investment, as opposed to buying bricks-and-mortar businesses on the ground, only really goes back as far as the 1980s.

Jimenez, who studied business at MIT under Nobel laureate Franco Modigliani, was in on the ground floor investing in countries like Brazil before anybody had heard of BRICs.

She started as a US equity analyst but fascinated by more exotic markets, she persuaded companies in the Third World Countries to send her quarterly and annual reports in the mail.

For holidays she would venture to Brazil or Argentina, toting piles of cash as it was a time of hyperinflation.

After seven years as a US analyst she got an opportunity to work, initially for free, at a start-up called Emerging Markets Management.

Today it has $12.7 billion under management. Jimenez later joined The Montgomery Funds.

In 1988, she worked on setting up the first Brazilian foreign fund, buying into Brazil’s then state-owned telephone monopoly Telebras when the government floated two percent of the shares. The market capitalization was $100 million.

“I couldn’t believe it,” she said. “Very few people had landlines.” After Telebras was privatized and broken into 12 regional companies in 1998, market cap was $40 billion.

“Back then, that was the frontier,” Jimenez said.

On another Brazilian trip in 1990, Jimenez says she noticed many of the buses were in dire need of replacement and most had been made by Brazilian bus maker Marcopolo.

With a market value of just $26 million, local brokers didn’t even think the company was worth a visit. She persisted.

“At the end of the tour where they park all the buses ready for delivery, I asked the manager how many buses are there and what is the average selling price per bus. I did a quick math and I found out in front of me were $80 million worth of inventories at market values.”

“The company was generating very high profit margin and very high ROE (return on equity). And practically no debt,” she added. “In front of me on the parking lot there was an inventory of more than the market cap of the firm. So I figured this is value. I can recall the market cap rising to $300 million.”

Brazil is no longer a frontier. Frontier Markets are typically seen as the next rung below emerging economies like the BRICs, Mexico, South Korea, Turkey or South Africa.

The Frontier Markets term was coined in the 1990s by the World Bank’s International Financing Corp, but index compilers such as Standard & Poor’s and MSCI Barra have only launched trackable indices for them over the past three years.

The national constituents of the various indices vary but typically include markets as diverse as Bahrain and Qatar, Jamaica and Trinidad and Tobago, Ukraine and Kazakhstan, Sri Lanka and Pakistan and Nigeria and Kenya.

What bunches them together is that they do have investable securities.

The outsize returns on offer are hard to ignore against increasingly depressed “First World” finance.

Take, for example, a typical US stock and bond portfolio split 60/40 —the past decade was the worst since World War Two, returning an annual average of just 1.4 percent, Reuters calculations show.

The big emerging markets, by contrast, more than doubled over the ten years, measured by the benchmark Morgan Stanley Capital International Emerging Market Fund .MSCIEF. Many frontiers rocketed. Ukraine’s PFTS bourse exploded 900 per cent higher in dollar terms.

Romanian equities jumped sixfold.

Mobius at Templeton said the proportion of his funds invested in frontiers has jumped from 2 percent to 10 percent in the past year.

“The four markets we like the most are Vietnam, Kazakhstan, Nigeria, and Ukraine,” he told Reuters’ The Dealing Room last month. “Reason is simply valuations. We’re finding the cheapest stocks in those markets, and they are growing pretty fast.”

Not for casual investors

Jimenez’s Victoria 1522 is a pretty small boat in a sea of investment ocean liners— very typical of the sort of vessels mapping a fresh route to frontier markets in recent years, and not for casual investors.

Minimum retail investment is $250,000. It started at an inauspicious time, in October 2008, a month after Lehman Brothers’ bust had sent global markets and the world economy into tailspin, and with just $5 million of startup capital from backer Bank of the Philippine Islands (BPI.PS).

Investing in a mix of 37 emerging and frontier market companies, Victoria now has $60 million under management.

Dressed in a floral-patterned shirt, black slacks and sneakers with a big backpack on her shoulders and her long black hair tied in a bun, Jimenez does not look like the typical Wall Street investor as she heads out for meetings in Port of Spain, the capital of Trinidad and Tobago.

She carries a shoulder-length case with all her files, research, and the background data that she needs to make decisions. “I don’t go anywhere without it.”

Such trips have taken her to Peshawar in Pakistan, to Chiapas in Mexico right after the 1994 revolt, Siberia in Russia and the border between North and South Korea.

One of her fund’s recent star performers was the world’s largest cobalt mining company in the Democratic Republic of Congo -—the London-listed Central African Mining and Exploration Company.

With China and India set to launch 3G cell phone services in 2009 and some Chinese companies seeking to develop electric cars, Jimenez concluded that a surge in demand for batteries meant it was worth investing in the cobalt used in battery production.

Within the year, CAMEC with a market value of $96 million was bought out by another London-listed Kazakh firm, Eurasian Natural Resources (ENRC) (ENRC.L), for $1 billion.

“We realised over 550 per cent gain in dollars on our investment. I didn’t even interview management,” she recalls of her unusually quick jackpot. “That idea didn’t come from a brokerage firm. It’s a real frontier. Congo is not in the MSCI Barra or S&P Frontier Markets indices.”

Frontier markets remain a small fraction of global investment.

As defined by the MSCI Barra indices, frontiers have a total market value of just $123 billion.

While that’s up sixfold from 2003, it remains just 0.5 percent of the $23 trillion market capitalization of the MSCI World index.

Crunching the numbers

A better comparison may be the more established emerging markets, which have jumped from about half a trillion dollars in 2003 to some $3.4 trillion this year— a leap from four per cent of the developed market pie to almost 13 percent.

Yet ascertaining just how much money has been going into frontier markets in recent years is not easy, in part because the very “frontier” nature of the asset class itself means data collection is in its infancy and definitions can vary widely.

But what can be gleaned from various sources suggests that the numbers are still quite small, reflecting the fact that for the most part frontier markets remain the playground of only a small, albeit growing, number of intrepid investors.

Investment flow trackers EPFR Global, for example, estimate that a net $1.83 billion has moved into 22 frontier equity markets over the past seven years.

This compares with net inflows of more than $80 billion committed by the equity funds EPFR traced to emerging markets in general over the period.

The numbers may be a bit misleading, however, as they reflect a period of nearly unrivalled market boom followed by a bust that has seen huge outflows prompted by flights to safety.

They also do not include what may be one of the main ways that investors tap into frontier market, that is almost by proxy through US or European-based companies with exposure to the frontiers, or indeed companies with operations on the ground in frontiers but with equity listings in London or New York.