Pension Funds Checking Frontier Markets
Frontier markets are being explored by an increasing number of South African pension funds, according to Franklin Templeton South Africa, local subsidiary of the global asset management group.
Franklin Templeton is close to offshore diversification trends at local institutions as it is known for the strength of its emerging and frontier market research and on-the-ground representation in numerous smaller markets.
“Growing interest in frontier markets by local institutions appears to be driven by two factors,” says Tanya King, Business Development Manager at Franklin Templeton SA. “Offshore allocations by our pension funds were recently lifted from 20% of assets to 25%, creating scope for a broader spread of investments.
“At the same time, growth in big emerging markets like China and India appears to be slowing. This could see GDP in these Asian giants retreat into single digits at a time when growth continues at a high level in several frontier markets.”
Frontier markets are less developed than emerging markets, with smaller stock markets and lower trading volumes. They are positioned as the emerging markets of tomorrow that on occasion offer surprisingly high returns today. Total returns on the MSCI Frontier Market Index topped.
Franklin Templeton, with an 80-strong Emerging Markets team and direct representation in 17 developing economies worldwide, was an early advocate of the business case for selected investment in frontier markets.
“Interest in frontier markets continues to grow among professional and institutional investors,” notes King. “This is understandable in view of their potential for high growth, their low correlation with developed markets and the prospect of identifying undiscovered and undervalued ‘gems’ among the listed companies in these jurisdictions.
“There are risks, of course. An important method of managing these risks is the deployment of investment professionals that are based in the jurisdiction in question and are familiar with local conditions and companies.
“The great diversity of frontier markets worldwide also spreads risk. Concerns about, say, Libya, would hardly result in ‘contagion’ affecting Romania or Vietnam.”
Growing institutional interest in frontier markets is regarded as positive by the South African arm of Franklin Templeton, an operation focused on investment research and business development.
“The JSE represents less than 1% of the capitalisation of global stock markets,” adds King. “Sole reliance on performance from such a small market is inherently risky.
“Add the 25% offshore ceiling to the 5% allocation permitted in African investments and our institutions have the capacity to invest up to 30% of their assets outside South Africa.
“That is a substantial percentage. It is only prudent to scrutinise all options, including high-potential frontier markets.”
