Special Report: Planes, trains and frontier markets

By Manuela Badawy

PORT OF SPAIN, Trinidad (BestGrowthStock) – Josephine Jimenez has a chunk of money to invest and she is hunting for opportunities in the usual places — Zimbabwe, Tunisia, Sri Lanka, among others. Jimenez is a specialist in so-called frontier markets. She stacked up a million air miles long ago.

A day after coming out of the hospital for dehydration in the Philippines, she flew home to San Francisco with her 8-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 globalization 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 U.S. 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 industrialized nations by 2032. That means the boat is now being pushed out further.

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


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 traveling 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 9 percent, 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.


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 U.S. 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 U.S. 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 (POMO3.SA: ). 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 U.S. 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 percent 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.”


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.

After a bowl of oatmeal and a cup of tea for breakfast, regretting that she had to skip the gym to make calls and catch up with business in San Francisco, Jimenez took a taxi at the front door of her hotel to meet a broker.

By the time she finished explaining to the driver where to go she was already there. It was just across from the hotel.

The building housing Bourse Securities Ltd where she was to meet Madree Seebaran is opposite the stock exchange, the finance ministry, the central bank, Scotia bank, and her hotel. Downtown Port of Spain consists of around six buildings around Independence Square. The tallest is a 15 story edifice called the International Financial Center, which the government hopes will house many financial institutions but which so far is largely empty due to the global financial crisis.

Jimenez grilled Seebaran on each of the 33 companies listed on the stock exchange. She looked at their history, earnings per share, local consumer market and other factors.

After hours of discussion, they took a taxi back across the street to the hotel to continue the meeting over lunch of coconut curry fish — a typical Trinidadian dish combining Caribbean and Indian influences. Cautious after her stint at the hospital in the Philippines, Jimenez pulled out her hands sanitizer and offered it to her guests. The hand sanitizer was pulled out frequently during the trip.

Jimenez doesn’t just sit in meetings, she likes to kick the tires, or in this case, check out the prices at a local market — the cost of plantains has doubled because of the drought due to the El Nino weather phenomenon, she discovers.


For 16th-century Europeans, securing access to remote and hyper-expensive cloves and cinnamon was a route to riches.

Jimenez’s big theme is seeking the value in globally scarce oil, gas and commodity resources of developing economies at a time when she believes global inflation is set to accelerate.

In meeting after meeting in Trinidad, she quizzed brokers, government and central bank officials about local business and an economy where energy accounts for 80 percent of its exports.

Flickering power-supply during many of these interviews may have given pause for thought.

Jimenez sees this sort of first-hand knowledge of a country with the highest per capita oil wealth in the region — some $215,000 compared with just a little over $5,400 in Brazil — as invaluable in assessing where and in what to invest.

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 realized over 550 percent 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.

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 4 percent 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 unrivaled 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 U.S. 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 — as with Jimenez’s Congo mining example.

Andrzej Blachut, head of emerging market equities at Zurich-based Swiss & Global Asset Management, for example, says he goes for companies such as UK-based and London-listed conglomerate Lonrho Plc (LONR.L: ), which have good business elsewhere but expansion plans in frontier markets.

Lonrho’s agriculture division recently bought Deere & Co (DE.N: ) and Komatsu Ltd (6301.T: ) dealerships for Mozambique.

Emerging markets specialist Charlemagne Capital took a similar approach when it sought to buy into the mineral wealth of Zambia. It invests through First Quantum Minerals (FM.TO: ), a Canadian company traded on Toronto’s exchange.

Even if the numbers are small, there are other signs of growth. Blachut, for example, says the JB Northern Africa Fund that his team runs has seen assets under management jump in recent months. From 40 million euros in November last year, they are now at 77 million euros. While some 25 percent of that rise can probably be put down to capital gains, the rest comes from increasing interest from institutional investor clients.

In a similar vein, Deutsche Bank has seen interest in frontier markets grow so rapidly that it has begun creating a stable of exchange-traded funds. Listed on a developed equity market, ETFs afford investors access to more exotic bourses without the hassles of direct investing.

Manooj Mistry, Deutsche Bank’s head of ETF business, says its broadest frontier market ETF — including countries such as Pakistan, Colombia, Nigeria and the United Arab Emirates — has seen a surge in interest. It only has $35 million in assets, but that is up from $18 million at the start of the year.

Another ETF, linked specifically to equities in Vietnam, has some $197 million in assets, up from around $145 million. Vietnam is something of a poster child for frontier markets, accounting for around 30 percent of the net inflows reported by EPFR Global for the 22 countries it listed.

From the beginning of this year through to the middle of April, the frontier markets component of the Russell Global Index outperformed all other global regions, with a rise of close to 11 percent compared with less than 4 percent for mainstream emerging markets.

Like Vietnam in the EPFR data, however, the Russell figures were dominated by a single country, Estonia. It suggests that more than its emerging market counterpart, the frontier market niche is highly dependent on the know-how of the manager, their experience in the country and skill at stock picking.


Pension funds remain wary. “We are having managers tell us about how great frontier markets are but I can’t think of anyone who is allocating,” Crispin Lake, senior investment consultant at Mercer, said of European pension fund thinking.

The barriers to large scale investment are many. For a start, market cap alone shows how difficult it would be for many of these often illiquid markets to cope with a surge of big money. Hot companies become crowded trades very quickly and soaring prices risk white-knuckle booms and bust.

Local brokerage fees are typically sky high and knowledge of the local trading community is essential to understanding wild price swings in infrequently traded and illiquid local bourses. Information is at a premium and often unreliable.

“Liquidity is your biggest problem in African equities,” said Salami at Duet. “When you want to buy stock, it is difficult to get it. When you want to sell it, it is difficult to sell it.”

Andrea Nannini, who manages $150 million in frontier markets at HSBC unit Halbis, said locals tend to account for over half the investor base in these markets, far more than in most emerging and developed markets. “It’s higher risk from the point of view that you have a large pool of investors who react to local events rather than international and global ones. That makes local factors very important,” he said.

Swiss & Global Asset Management’s Blachut says corporate reporting is very spotty in many frontier markets and one of his top priorities is to see a cash flow statement.

He reckons many companies in frontier markets habitually underestimate how much money they need, and it is not uncommon for an investor to make a commitment and then see the company go to the market for more. Dilution, Blachut says, is one of the biggest problems facing the frontier market investor.

Others feel investment in smaller frontiers is effectively like being a private equity investor, providing the key expertise, skillsets and outside contacts that a small-to-medium-sized family-owned enterprise might not have.

Sev Vettivetpillai, CEO of emerging market private equity firm Aureos Capital, which has some $1.2 billion under management, said many frontier market countries lack sophisticated advisers, accountants and investment bankers.

“Secondly, these businesses lack proper transparency and proper systems and processes. That’s why they come to us,” he said. Echoing the long-term horizons of nearly all frontier investors, Aureos is talking 10 years at a time.

“If you want to invest in our (private equity) fund, that’s five years investing, five years holding, you are locked in for 10 years,” said Vettivetpillai.


Political risk in frontier markets is routinely high — and Jimenez has seen the wrong end of a rifle.

On a trip to Gaza in 1999, an Israeli friend dropped her at the border, where she passed through a checkpoint and hailed a taxi. “We passed by a tank in front of some buildings so I asked him to stop so I could take some pictures. In a few seconds I was surrounded by soldiers asking me who I was and why I was taking pictures and (demanding) that I should surrender my camera,” Jimenez recalled.

“I was able to convince them that I was an investor and that I had an appointment with the Palestinian Economic Authority — I was able to keep my camera and film,” she said, adding: “It would not have been the case if I had been a man.”

Correctly judging the outcome of major political upheaval can bring a windfall. Sri Lanka’s stock market (.CSE: ) has returned more 170 percent in about 18 months as its 30-year-old civil war came to an end in May of 2009.

“I think political risk is overblown,” said Richard Laing, head of the British government development arm CDC which invests in private equity, infrastructure and mezzanine finance.

Laing cites Ivory Coast rubber firm Cavally that kept operating right through the 2002-03 war and subsequent unrest. “The business has kept going. It has had access to ports, it has not been nationalized. If you are in the private sector, you can continue to operate despite political turmoil.”

Of more prosaic concern for many are the threat of exchange controls on currency movements, arbitrary curbs on stock exchanges or sudden withholding taxes on foreign investors.

Nannini at Halbis recalls how directors of the Karachi Stock Exchange (KSE) suddenly decided in August 2008 that stocks could not fall under the closing levels of the previous day. They were attempting to halt a plunge that wiped $40 billion of market value off the KSE since April of the same year and came ten days after Pakistan’s incumbent President Pervez Musharraf had quit to avoid impeachment.

“They suddenly imposed a floor to stock prices so any trade on stocks could not be below a certain level,” he said.

Corruption too remains a frequent scourge.

Laing at CDC said a power station manager he worked with in Bangladesh once told him it would take two days to return from the port with some imports because he didn’t pay bribes.

“If you are someone who does not pay bribes, the official will be having lunch with someone who does,” said Laing.


For now, frontiers remain the preserve of the few. The biggest winners will be those who bet on countries that graduate to the next tier, as the BRICs have done.

Goldman Sachs aimed to answer that question in research two years after its 2003 BRIC research. It identified the “Next 11” — a mixed group of advanced emerging markets and frontier economies based largely on population size and growth potential. Of the eleven countries, at least five — Bangladesh, Iran, Nigeria, Pakistan and Vietnam — could be considered frontier markets for investment purposes.

While Goldman does not see any of them becoming as large as the BRIC economies, it says the gross domestic product of the diverse N11 group as a whole could still reach two thirds of the G7 by 2050, while countries like Vietnam could see more than a five-fold rise in incomes over 25 years.

Emerging markets specialist Charlemagne Capital notes that of the world’s 20 most populous countries, only three are developed markets. Of the remaining 17, seven cannot yet be classified as emerging. Between them, the firm notes, Pakistan, Nigeria, Ethiopia, the Democratic Republic of Congo, Bangladesh, Vietnam and Iran have 750 million people ready at different stages to create demand.

Zain Latif, chief executive of frontier private equity firm TLG Capital, is watching another indicator — the return of a diaspora, especially in Africa.

“It’s not only to do with GDP numbers. When you look at India, China, what really changed these countries was the diaspora returning. In the ’80s and ’90s, Indians and Chinese were still working in Western law firms, accountancy firms and as doctors and nurses. And then when their countries opened up they went back, opened businesses, demanded rights they had seen in the west and opened up entrepreneurship,” he said.

“For Africa, that’s only beginning.”

Michael Kart, Managing Partner at Marshall Spectrum, whose frontier fund focuses on the Eastern Europe and Central Asia, enjoys the adventure. “Basically you are buying an option on development in these countries,” he said.


Living on the edge takes a particular kind of person — and Jimenez’s life would not be to everybody’s tastes.

At the age of 47, she decided to be a mother, returning to her hometown of Manila to adopt a 3 month old baby girl whom she named Netanya, which means “God’s gift.”

“My life has evolved around my work, until I decided not lose out on motherhood,” she said.

Due to the legalities of adoption the child had to stay in the Philippines for the first six years of her life, and so Jimenez would travel to San Francisco every two weeks for meetings and other work-related issues, a commute that helped her accumulate around a million air miles.

“Netanya’s first words were ‘inventories’, ‘chemicals’ and ‘beverage’, because she would listen to my conference calls every morning while we were living in the Philippines,” Jimenez said. Now eight years old, Netanya has her own mattress underneath a desk at Victoria 1522.

“To make it fun I put a blanket around it like a tent. She has stuffed toys, she sleeps there while I am working, only because sometimes I need to be there with the traders. So at 2 am I wake her up, ‘Time to go home,’ because the next day she has to be at school.”

From Trinidad and Tobago, Jimenez flew to Panama for a day of back-to-back meetings, before returning to San Francisco for an appointment she could not miss.

“I am going to be a reader in my daughter’s class. She has been waiting for me to do this all year.”

Stock Market Report

(Additional reporting by Carolyn Cohn, Sujata Rao and Sebastian Tong, writing by Mike Dolan and Jeremy Gaunt, editing by Claudia Parsons)

Special Report: Planes, trains and frontier markets