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Mobius has spent more than 40 years working in emerging markets, and is considered among the foremost specialists in this area. He shares with AsianInvestor his views about frontier markets û those that are so small and largely unnoticed that they donÆt appear on the radar screens of most emerging market fund managers.
Frontier markets came into style, so to speak, around two years ago. Over the past two years, do you think frontier markets have lived up to expectations or has it been just hype?
Mobius: It's really too early to say. This is similar to when we started in 1987 with emerging markets. Our first fund was only $100 million and we had only five markets in which to invest. Now our fund is $42 billion and we have 40+ markets in which to invest. The same will happen to the frontier markets. They will grow but it will take time.
Can you talk about your experience in investing in frontier markets?
Frontier markets have their challenges and their rewards. It is more difficult getting information, but we often come across some very interesting companies and situations. Only last month, Nigeria closed its markets for a week to prevent the market going down. But were quite excited to see the market come down as there are a number of great Nigerian companies we have been looking at for a while but we felt they were a bit expensive. We since heard that the markets were not closed and that it was a "computer glitch". This is nothing new to us. Many years ago, Hong Kong also closed its market. From experience, we know that all that happens is the market opens lower when it does open. This, for us, is an opportunity to pick up great stocks.
How have the subprime and credit crisis in the US, and now fears of a US recession, affected frontier markets?
In general, these markets have not been adversely affected by these events. In most of the frontier markets the banks are just getting their heads around lending to customers rather than taking in deposits and investing in government bonds so they have not been involved in some of the products that have caused the difficulties. However, to the extent that credit may be harder to come by for banks, there have been some areas where they have had to make alternate arrangements. But these have not negatively affected their business.
At this point, have frontier markets still maintained their "frontier" status in the sense that fund managers have not yet crowded out each other?
There are a surprising number of companies to choose from. Some of course are difficult to buy as they are illiquid but we have a wide range of companies to choose from and if we buy carefully we can get stakes in most companies that we want to buy.
What are the main challenges you are facing now when it comes to investing in frontier markets?
Getting the information to analyze the companies in a timely fashion is the main challenge. This is mitigated by the fact that the team working on the frontier markets is in various offices throughout the world so we are able to draw on many people to do the work. While it is more challenging then emerging markets, it is still easier than when emerging markets started many years ago as the internet is a great tool. Of course nothing replaces person on the ground visits to kick the tires.
What are the major risks of investing in frontier markets, and how are you managing those risks?
The risks are poor information, illiquid stocks and sudden policy changes that governments can implement. We manage these by diversification, having a healthy margin for error in all out stocks we select and by staying out of one or two countries where the economic and political outlook is just too difficult to predict.
What are the main opportunities?
Finding undervalued stocks that no-one else has.
What is your outlook for frontier markets in general, and for the specific frontier markets that you favour?
These markets are going to develop into emerging markets and we want to be there to take advantage of their growth. Africa is an area that we expect to see much progress, but itÆs not for the faint-hearted as there will be setbacks along the way.
For an in-depth review of frontier markets, see the July 2008 issue of AsianInvestor magazine.
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