Learn more about Tundra’s definition of Frontier Markets, how we differ from the pack, and why we believe the fund can offer an exciting long-term upside and be a good diversification in the global equity portfolio in this report. Read about all the fund in the Full Prospectus on the Buy/Sell page.
We publish a monthly letter commenting on market developments and our funds. Read the latest as well as previous editions here.
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Capital invested in a fund may either increase or decrease in value and it is not certain that you will be able to recover all of your investment. Historical return is no guarantee of future return.
The Full Prospectus, KIID etc. can be found at Buy/Sell and the Annual and semi-annual reports can be found at Annual Reports. You can also contact us to receive the documents free of charge. Please contact us if you require any further information:+46 8-55 11 45 70.
Frontier markets are the new emerging markets and include countries such as Vietnam, Bangladesh, Pakistan, Sri Lanka, Nigeria and Kenya. These are countries coming from a low level of economic development but which have gone through a transformation in the past decade and now belong to the fastest growing economies globally. From time to time economies from the Middle East are also included in the frontier market group. Tundra has chosen not to focus on a majority of the Middle East nations given that countries such as Qatar, U.A.E. and Kuwait have a similar or higher level of economic development than Western Europe and it is therefore reasonable to assume that the region will not be subject to the same level of economic growth as the remainder of frontier markets over the next few decades.
Economic growth in frontier markets is driven by:
- Demographics: Frontier markets have young fast growing populations. This creates economic growth as more and more people join the work force. According to statistics from the U.N., the population in frontier markets will grow by 1.2% in the next two decades compared to 0.6% in emerging economies and 0.2% in the developed part of the world. Today, frontier markets represent close to 50% of the global population but only 5% of the global market cap. People in countries such as Pakistan, Kenya and Sri Lanka are also becoming better educated. Education contributes to higher levels of productivity.
- Urbanisation: Frontier markets are going through a clear urbanisation trend – gradually more and more people are moving from rural to urban areas. As this transition takes place, infrastructure investments increase, children and young people get access to modern education and a growing portion of consumption takes place through the formal economy in super markets and department stores rather than through the local market. In countries such as Sri Lanka, Kenya and Bangladesh, less than 40% of the population is urbanised compared to 80% in Western Europe and the US.
- Infrastructure investments: Infrastructure investments take place continuously in frontier markets. Reliable power supply is ensured, the road networks are expanded, and a growing proportion of the population gets access to computers and telecommunication networks.
- Foreign direct investments: Foreign direct investments in frontier markets have increased over the past decades. For several years now, Nike produces more shoes in Vietnam than in China and Samsung Electronics, the South Korean electronics giant, produces half of its handsets in Vietnam. We recognise this pattern from history – Japan, South Korea, Taiwan and China have already gone through this phase. Now it is time for countries such as Vietnam, Bangladesh and Pakistan to take their turn.
- Rising political stability: We tend to associate countries in Africa, Asia and other developing parts of the world with political instability. This is only partially true. Never before has Africa, for instance, had so many democratic governments as today. In addition, the number of armed conflicts has seen a decline in the past decade.
Frontier equity markets tend to still be dominated by domestic investors. The number of foreign pension funds, insurance companies and asset managers which are active in frontier markets is limited. To a large extent, these markets are still uncharted territory. The limited number of foreign investors also means that frontier equity markets tend to be less analysed. As an investor with a sizeable dedicated investment team, this is something we can take advantage of. For long-term investors it creates opportunities to find under-researched and undervalued companies.
Limited foreign investor participation also contributes to frontier markets having relatively low correlation with other equity markets and asset classes. Replacing a portion of a global equity portfolio with frontier markets can contribute to reducing the overall risk level of the portfolio.
Just as frontier markets offer great return potential over time, the asset class is also associated with risks.
- Market liquidity is still worse than in more developed asset classes.
- Despite improvements in terms of political stability, frontier markets are still associated with more political risk than emerging markets.
- Frontier market currencies tend to be more volatile than emerging and developed market currencies.
- Poor corporate governance and presence of corruption can be assumed to be more prevalent than in other parts of the world.
Tundra works proactively with these issues with the help of a dedicated sustainability team.
Frontier markets have historically struggled with high gearing. This is no longer the case. Write downs combined with high economic growth have resulted in frontier markets today having a lower gearing (measured as external debt as a portion of GDP) than for instance the G7 countries.
Suitable for actively managed funds
Passive investment vehicles such as ETFs and index funds have grown in popularity during the past years. Frontier markets are less suitable as targets for passive vehicles. Transaction costs are typically higher; they tend to lack a functioning futures market; indices rarely fully reflect the structurally most attractive investment opportunities, and finally, because frontier market companies tend to have less analyst coverage, substantial opportunities for outperformance are created through active management. This is also frequently reflected in the poor relative return of passive vehicles targeting frontier markets.
Our investment selection is made in accordance with traditional fundamental analysis. Our funds are actively managed.
Prior to each potential investment, we conduct an analysis of the company concerned, where we assess what we believe is a long-term stable earnings level. We adjust for what, in our opinion, represents short-term excess profitability or poor profitability. We combine this with an assessment of the company’s future growth prospects to establish a long-term fair value of the entity and its share. We compare this with the current share price, and then we either invest or refrain from investing.
If we conclude that the fair value is significantly above the current market value our next step is to identify the reasons for the divergence in valuations. Is it company, sector or country specific? If we cannot find a reason we might have missed something in our analysis.
Provided we have identified why the factors behind why current market value does not reflect the fair value, the last step before investing is to identify potential triggers for a revaluation of the stock. We will not make an investment until we see that the factor or factors weighing on the stock have changed.
Tundra Fonder has no restrictions on what proportion of the portfolios may be invested ”off benchmark”. This also means there will be times when we fall behind our competitors. Daring to take the risk of ”being wrong”, not only in individual quarters, but even years, is essential for success in creating good long-term returns, we believe. Tundra Fonder’s products are not for investors seeking short-term stable returns, nor a return in line with an index. Such investors are better off investing in one of the successful hedge funds or in an index fund.