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Appetite for frontier market funds languishes

Many fund selectors seem to be of the conviction that frontier market funds are too risky to invest in because fund managers lack specialist knowledge about many of the countries they invest in. “There is no Africa fund managed by someone with a clear capability and understanding of all the moving parts”, one fund selector told research firm Cerulli.

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Speculation bias

Another factor at play could be the inherently speculative nature of frontier market investments. As a consequence they by definition make up only a very small proportion of portfolios. Many smaller companies avoid the asset class because they can’t invest a viable amount of money in frontier markets funds, or because they don’t have the resources to do specific research on the asset class.

But inflows are steady

While new fund launches on the asset class are becoming rarer, investors are certainly not avoiding the asset class. Net inflows have been positive during all but two months since July 2012. There is no other asset class to rival that record, though inflows have been small compared to the other asset class, with total net inflows in the first 7 months of 2014 totalling €759mln. 

Discounting investors who do not invest in frontier markets, Pan-European fund selector sentiment is net positive with roughly a quarter of Europe’s fund buyers planning to increase their exposure to frontier market equities. Enthusiasm for the asset class varies greatly per country though (see graph below). 

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Part of the Bonhill Group.