Emerging markets funds: A safer route to the frontier

published 20 January 2012

Jim O'Neill first coined the term Brics' (Brazil, Russia, India and China) in 2001, when he was head of Goldman Sachs global economic research. He has invested there ever since. So last year must have been a disappointing one for him: the Bric index fell by about 25% in 2011, as did the MSCI Emerging Markets index.

Now investors are being told to look further afield to frontier' markets. These are countries that have stockmarkets but, due to their size, inexperience or political instability, do not qualify for emerging-market status. Vietnam, Argentina and Tunisia, for example, make the cut.

Surprisingly, given their vast wealth, Gulf states such as Qatar are also classed as frontier markets. Allan Conway, Schroders' head of emerging-market equities, explained to the Daily Telegraph: "People think of frontier markets as underdeveloped and poor. This may be true of Bangladesh and Vietnam, but the Gulf countries are very wealthy. They are classed as frontier because there are some restrictions on foreign investment."

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Yet there are signs that restrictions are lifting. Saudi Arabia, which isn't listed as a frontier market because of a licensing disagreement with MSCI, has made moves to open up its exchange, the Tadawul, to international investors. In 2008, it allowed indirect access through swaps.

Now the Saudi regulator may allow international fund managers to invest directly. Saudi authorities hope that this will help smooth the violent swings in the $340bn Tadawul. The reforms should also help appease small, middle-class investors burned by recent stockmarket crashes, says Robin Wigglesworth in the FT.

The desire of Gulf governments to appease their populations through public spending in light of the Arab Spring should boost investment. Unlike most developed economies, Gulf countries can afford the expense. The region holds 35% of the world's oil and 23% of its natural gas. Saudi oil minister Ali al-Naimi recently announced the country would aim to sell oil for $100 a barrel, rather than the $80 price range of recent years.

One way to play the region is through Qannas Investments Limited, a new investment trust managed by Abu Dhabi Capital Management. The trust will list on Aim and invest across the region. Another option is the Qatar Investment Trust (LSE: QIF).

It's up 1% since we tipped it last July, but the discount to net asset value has now widened to 17%. The board is set to vote on whether the trust should be wound down. If it does so and gets a fair price for its assets, shareholders could make a tidy profit.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.