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Mark Mobius on new frontiers

INTERVIEW: Mark Mobius tells Leonora Walters why investors should allocate more to emerging markets and how to find undiscovered gems
October 15, 2010

Veteran emerging markets investor Mark Mobius is best known to UK investors as manager of the Templeton Emerging Markets Investment Trust, one of the largest UK investment trusts with a market capitalisation approaching £2bn. He has been investing in emerging markets for more than 30 years, and like a number of emerging markets managers is frustrated at the poor representation this sector has in the portfolios of many western investors.

"Most investors are severely underweight emerging markets, but people are beginning to wake up to the fact that they need to be exposed," says Dr Mobius.

Emerging markets not only have obvious attractions such as superior gross domestic product (GDP) growth - the forecast for 2010 is 6.6 per cent, three times the equivalent for developed markets - and have much lower public debt. Dr Mobius also points to the much higher level of foreign reserves. "This is not only because of cheap labour and exports, but also because there is a lot of foreign direct investment," he says.

New frontiers

While he acknowledges the attractions of leading emerging markets such as China, India, Brazil and Russia, Dr Mobius is on the look out for new investment opportunities in the so-called 'frontier markets'. "At present frontier markets only account for around 2 per cent of the emerging markets, but they are growing," he says. "For the first time you have the inclusion of the oil-rich Gulf states, with very liquid markets such as the United Arab Emirates, and even Kuwait and Bahrain. The emerging market definition was traditionally low and middle income countries which excluded these nations."

Frontier markets are underdeveloped equity markets that index providers such as FTSE, MSCI and Standard & Poor's do not feel are sufficiently developed to include in their emerging markets indices. Typically a frontier market index comprises 20 to 30 countries predominantly in the Gulf states, with Asia and Latin America also an important part. These countries are also growing faster than emerging markets, with projected growth of nearly 10 per cent between 1992 and 2012, in contrast to 8.2 per cent for emerging markets.

As frontier markets are relatively new capital markets in early-stage development, with low levels of foreign ownership, they are under researched. "Frontier economies can offer unspoilt markets that welcome early (and experienced) investors - holding out prospects that growth could be strong or even spectacular over time," says Dr Mobius.

He also argues that frontier markets provide good diversification to emerging markets. "Frontier markets have a low correlation with emerging markets, which is a reason why many institutional investors are allocating to frontier markets - diversity and consequently lower volatility. More new money is coming into frontier markets to find value as emerging markets prices go up. Of course, in times of crisis there is a high correlation. But if investors want to withdraw cash, they first go to their emerging markets holdings because these are more liquid."

Frontier markets span five separate world regions which means they have a low correlation as a group, and are often uniquely positioned in terms of industry strengths and access to natural resources. "History never repeats itself exactly but we believe that these markets have much in common with countries such as Brazil and China 20 years ago," says Dr Mobius.

One of his favoured destinations is Nigeria, which makes up the Templeton Frontier Markets Fund's second-largest geographic exposure. "The economic structure there shows incredible consumption," he says. "Nigeria is expected to grow by 7 per cent in 2010 compared with an average of just 2.3 per cent for developed economies."

Private consumption accounted for 76 per cent of the country's GDP in 2009, and Dr Mobius plays this theme via banks. He generally favours financials with this fund, especially Nigerian banks which he says are undervalued. This is the largest sector exposure for the fund at nearly 32 per cent.

Mark Mobius CV

Mark Mobius is executive chairman of the Templeton Emerging Markets Group, and manages their funds including the Templeton Emerging Markets Investment Trust, which he has run since inception. He has worked at Templeton since 1987.

He has bachelors and masters degrees from Boston University, and a PhD in economics and political science from the Massachusetts Institute of Technology.

Off the radar

Dr Mobius and his team also consider exposure to countries not currently included in Frontier market indices but which share some of the positive investment characteristics of their neighbouring countries - for example, Saudi Arabia.

"Palestine has a stock market and we are getting approval to invest," he says. "This could be interesting because the Palestinians are very enterprising, although we have no specific companies in mind yet. Although Palestine only has a population of 2m people, sometimes big multi-nationals grow out of these small markets. You find gems in places you don't always expect to."

He is also seeing the growth of new markets in Africa. "Libya, for example, already has a stock market and is encouraging the privatisation of state-owned enterprises - a development being repeated across a number of African countries," says Dr Mobius. "We also access frontier markets via listings in western and more developed markets. For example, we hold National Bank of Greece because it has a very profitable operation in Turkey." Another example is his holding in South African-listed telecoms company MTN Group, which has a substantial business in countries such as Nigeria and Kenya.

The portfolio of the Templeton Emerging Markets Investment Trust is not heavily invested in frontier markets, although it does have a small exposure to Pakistan via MCB-Financial, the fourth-largest bank in Pakistan. Dr Mobius says it has attractive valuations and a relatively high return on equity.

"I look at frontier opportunities as much as I can with this portfolio, but the turnover is very low," he explains. "We are very happy where we are right now and high turnover is not a good thing."