Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The new portfolios are the Franklin Templeton Investment Funds (FTIF) û Templeton Frontier Markets Fund, the FTIF Templeton Asian Smaller Companies Fund, and the FTIF Franklin Mutual Euroland Fund.
The two new emerging market funds provide opportunities to invest in young economies and companies, both of which are expected to be well positioned to benefit when the global economy turns around. The Euroland fund provides exposure to Europe.
The FTIF Templeton Frontier Markets Fund invests primarily in smaller, less developed and less accessible countries that have the potential to grow at a fast pace and become tomorrowÆs emerging markets.
Frontier markets are developing economies with relatively undeveloped equity markets. There is no strict definition for what constitutes a frontier market, but they typically fall outside the emerging market indices such as the MSCI Emerging Markets Index. Frontier markets tend to comprise the Middle Eastern, African and some of the smaller Asian and Eastern European markets.
With an estimated combined market capitalisation of around $1.7 trillion, frontier markets are in the early stages of development and growing towards entry into the emerging markets indices. They offer the prospect of high growth rates and returns, together with low correlation to the more mainstream emerging and developed markets.
ôFrontier markets are where many emerging markets were 20 years ago when we started our first emerging markets fund,ö says Mobius, executive chairman of Templeton Asset Management and lead portfolio manager for the fund. ôChina, for example, was considered to be a frontier market about 15 years ago. Its market capitalisation grew from $18 billion as of end-1992 to $4.7 trillion as of end-June 2008.ö
The Frontier Markets Fund offers investors the opportunity to invest in a ôyounger generation of emerging marketsö and to diversify their portfolios due to the lower correlation of frontier markets with global markets.
Other positive characteristics of frontier markets include: positive economic trends û frontier market economies are growing at a robust pace; potential for capital market growth û current market capitalisations of frontier markets are relatively low compared to emerging markets, providing the opportunity for significant growth; and attractive valuations û many companies in frontier markets are trading at low price-to-earnings ratios.
The risks involved in investing in frontier markets include geo-political issues, lack of liquidity relative to other markets worldwide, and the tendency for companies listed in frontier markets to be under-researched. In some cases, regulatory issues are also considered risks.
The second fund, the FTIF Templeton Asian Smaller Companies Fund, seeks long-term capital appreciation by investing primarily in small capitalisation companies in Asia ex-Japan, or those companies that derive a significant proportion of their revenues or profits from Asian economies. Typically, small capitalisation companies are defined as those that have a market capitalisation of less than $2 billion at the time of investing.
ôSmall-cap companies have the potential to deliver substantial capital appreciation as they develop into well-established, large-sized companies,ö says Mobius. ôThe fund aims to identify such companies early and invest in them, which could be highly rewarding in the long term.ö
The Asian Smaller Companies Fund offers a focused portfolio that aims to benefit from the ôhidden gemsö in Asia. Multi-cap Asian strategies can sometimes be too large to invest substantially in small-cap companies. On the other hand, small-cap global strategies do have some exposure to Asia, but this exposure is diluted because they must also focus on other emerging markets around the world.
The Asian Smaller Companies Fund gives investors access to a portfolio that concentrates solely on Asian small-cap stocks.
Both the Frontier Markets Fund and the Asian Smaller Companies Fund are managed by Mobius, a pioneer in emerging markets investing with more than 30 years of experience in these markets. He and his team of 50 investment professionals, including 38 portfolio managers and analysts, are spread across 14 emerging markets offices, providing local perspective and tracking value opportunities for the funds.
The third fund, the FTIF Franklin Mutual Euroland Fund, aims to achieve long-term capital appreciation by investing primarily in securities of companies incorporated or having their principal activities in Euroland countries. These are countries that have adopted the euro as their national currency or the member states of the European Monetary Union.
Now may be a particularly exciting time to invest in European companies, according to Franklin Templeton. For the past decade, companies in Europe have been undergoing structural changes, along with international business expansion. Europe now accounts for more than 30% of the worldÆs total market capitalisation and is home to many global industry leaders such as the worldÆs largest lighting company, the leading mobile handset maker and the worldÆs largest wealth-management company.
The Euroland fund is managed by Philippe Brugere-Trelat, vice-president of Franklin Mutual Advisers. He is assisted by Katrina Dudley.
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