For Tim Drinkall, plain-vanilla banks in the Middle East and Africa are a good bet on sustainable economic growth in those regions.
Drinkall, portfolio manager of the Morgan Stanley Frontier Emerging Markets Fund (MFMIX), looks for deposit-taking and lending institutions, among other stocks, in more than 30 so-called pre-emerging market countries.
“We continue to focus on countries that have relatively low levels of financial intermediation, and on individual banks that are well-capitalized with solid returns on equity and that are competitively positioned,” he said.
Drinkall’s search takes him to frontier emerging market countries such as Qatar, Nigeria and Saudi Arabia. The term, he said, doesn’t mean in all cases that those countries’ economies are “underdeveloped.” Rather, it means “their equity markets are underdeveloped or at an early stage of development.”
He said the institutional fund looks at countries where “gross domestic product growth, fiscal policy and reform agendas remain constructive and at companies with strong earnings visibility, sensible management and solid balance sheets.”
Targeting that criteria has helped the fund return 15% over the past 12 months, compared with 11.4% for its benchmark, the MSCI Frontier Emerging Markets Index, according to Morningstar and MSCI, respectively. Over the three years the fund has returned 4.2%, besting a 3.7% return for the index, data from Morningstar and MSCI show.
Drinkall, who manages the fund from New York, said the frontier emerging markets category includes some “very wealthy Middle Eastern countries like Qatar, which has GDP per capita over $100,000.”
Commenting further on financials, he said his team focuses on countries that have less than 50% private sector credit to gross domestic product, a ratio that suggests sustainable loan growth in the banking sector of 15% to 20%.
Top bank holdings for the fund include Burgan Bank SAK (BURG.KW), one of Kuwait’s biggest lenders by assets, and Nigerian firms FBN Holdings PLC (FBNH.LA) and Guaranty Trust Bank PLC (GUARANTY.LA).
“Over 50% of the MSCI index is in financials. Oftentimes in these early-stage equities markets, the first things that are listed are the larger banks and then the utilities and telecom companies,” Mr. Drinkall said.
The fund, which has $52 million in assets under management, was a closed-end offering with a set number of shares since 2008 but became available to new investors this past August.
Mr. Drinkall said of the change: “We had more and more clients that wanted to have an open-end, daily liquidity product.”
However, Gregg Wolper, an analyst with Morningstar, said frontier markets haven’t yet developed a broad interest among investors because of various political risks and other issues, but added that those regions will still attract a following among those “who are trying to look for the next big thing” or “think outside of conventional areas.”
He said a strong position in financials, in particular, is pretty common for fund managers who target those countries as they are “among the most liquid stocks out there” within that area.
One factor that distinguishes frontier markets from other regions, he said, is a low correlation to developed markets and emerging markets.
“People are often surprised to learn that benchmark volatility in the frontier markets is 11%, half that of the 22% in the emerging markets,” Mr. Drinkall said, adding that the low volatility is “one of the benefits of the lower liquidity found in these markets and the fact that there is less foreign investment and hedge fund activity.”
Other top positions for the fund include telecommunications providers such as Etihad Etisalat Co. and Qatar Telecom QSC. Drinkall said, “The particulars of the frontier markets-growing economies and demographics that tilt very young-set the stage for telecom companies, especially in regions where mobile penetration and data usage are still low.”
Dow Jones Newswires