Cheap entry to frontier markets

Frontier markets are the world's fastest-growing economies. Think Africa, Vietnam, or even Iraq. Many investors want to add a small portion of frontier markets exposure to their portfolios.

Unfortunately, our favourite means of exposure to this sector, the BlackRock Frontiers Investment Trust (BRFI) - one of our Top 100 Funds and a member of John Baron's investment trust portfolio - is trading at a premium of 8 per cent to its underlying net asset value (NAV). The trust was one of the three best performers among our Top 100 funds in the year to the end of June 2013, posting a 48 per cent return to investors.

However, there is a worthy and much cheaper alternative in the form of Advance Frontier Markets Fund (AFMF). This investment trust, by contrast, trades at an 8 per cent discount to NAV. It did perform worse over the year to the end of August 2013, posting 18 per cent in share price total return compared with 38 per cent from BRFI. However, is that one year differential enough to justify such a difference in rating?

Advance Frontier Markets' discount has actually crept in a little since June 2013 when it was 15 per cent. However, prospects for Advance Frontier Markets' discount closing further look promising. The board of AFMF will give shareholders the opportunity to get their money back at NAV in 2016.

Slim Feriani, manager of AFMF, says: "We've been investing in frontier markets for nine years and the best-of-breed managers we invest with have, on average, been investing in frontier markets for more than 10 years, definitely through more than one investment cycle. We're the only frontier markets manager to be rated Gold by S&P."

Mr Feriani gets access by constructing a portfolio of funds that gives investors access to the most attractive frontier markets. He believes that the people best placed to take advantage of pricing anomalies in emerging and frontier markets are locally based managers with extensive experience of their specific markets. He also views discounts on closed-ended funds as an opportunity to add further value. Investors Chronicle has already written positive reports on two of the funds that Mr Feriani holds in the portfolio, Qatar Investment Fund and Vietnam Holding. Africa is the main exposure in the portfolio at 37 per cent, while on an individual country level he has big holdings in Nigeria, Vietnam, Saudi Arabia and Qatar.

The approach is different to the manager of BRFI, Sam Vecht, who is a stockpicker in the frontier markets countries, holding 55 stocks in 23 countries. AFMF is much more diversified than this, making it a lower-risk option.

If you already hold BlackRock Frontiers Investment Trust, then the premium and performance means it is a good time to lock in some profits. If you want to maintain your exposure to frontier markets, then Advance Frontier Markets Fund looks like the more attractive place to be - and would be our choice for new investors dipping their toes into frontier markets. Buy.

Price and discount as at 30 September 2013

Source: Investors Chronicle and AFMF

*To 30 August 2013. Source: Morningstar and MSCI

TOP 10 HOLDINGS (as at 31 July 2013)

GEOGRAPHICAL BREAKDOWN (as at 31 July 2013)