Investing in frontier markets is not an easy task. Many tried, few succeeded. There are risks that investors with only US or European exposure, most likely, will never experience in their lifetime.
To be a frontier markets investor, you need thick skin. Some of us don’t have this innate quality, thus we have to develop it, to nurture it.
We can better do it by following the best in the field, observe their actions and try to develop and emulate their qualities. I am not looking for NLP sessions, all that I want to find are the similarities between the most successful frontier markets investors.
Following last week article about the five best performing investors in frontier markets, certain investments behaviors stood out and made me wonder what do their performance have in common? Where are they investing and how are they doing it?
Certain sectors and investment styles were prevalent, thus this post was born to show them and take notes for my next investment.
LOCATION, LOCATION, LOCATION
No! I am not talking about real-estate here. One quality all investors shared is specifically locating their investments.
Whether is one of Mark Mobius 30 funds or a Wytze Riemersma country specific fund, the take here is the more geographically specific a fund, or investment is, the better the performance it returns.
The common-sense investor will think that having a broader geographical location with more stocks to choose from will yield a better return. However, reality is not always intuitive, so the paradox that brought consistent returns to our investors is to be as geographically targeted as possible.
One of the best performers has been Wytze Riemersma’s TCM Vietnam High Dividend Equity with an overall return of 75% in 5 years. Quite impressive, but it is worth mentioning that almost everybody with exposure to Vietnam has been high rolling these years.
VALUE INVESTING – WARREN BUFFET STYLE
Again and again, value investing is the most profitable one. Ever since this post I demonstrated the difference between investing and speculating.
Needless to say, there are a lot of perils your capital is facing in frontier markets. Investing with a margin of safety as Warren Buffet does with his cheap stocks; value investing has proven the best way to do business in frontier markets.
Two of the most consistent frontier markets investors along the years have been Mark Mobius and Thomas Hugger. What is their investing style? Exactly, value investing, bottom-up analysis.
Why is value investing such a successful strategy? As mentioned above, your capital is exposed to a lot of dangers, so taking a direct approach and investing as if buying a piece of a private business makes the most sense.
Taking a bottom-up, value investing approach, an investor is creating what Ben Graham called a margin of safety. In essence, the value investor tries to limits his downside as much as possible.
SECTORS – THE GOOD, THE BAD AND THE UGLY
Browsing through fund allocations, two sectors where on investors list as priority, mainly as a percentage of their funds.
Given the young demographics and rising income of frontier markets, there is no wonder these two sectors offered the returns that allowed investors to be on the top list of frontier markets investors.
The most invested in sector was the consumer staples sector. It should be no wonder, as you won’t find strong anti-tobacco campaign in frontier markets, nor low-everything dietary trends as in developed countries. With the rising income and a developing middle-class, having exposure to this sector is the same as investing in Procted&Gamble in 1946 post-war US boom.
The second sector with a high percentage of fund invested is the financial sector. Again, another counter-intuitive sector.
After the 2008 crisis, with all the regulation and capital requirements in US and Europe, it is hard to think of a financial stock as a valid investment proposition. However, with less regulation and less speculative flows and higher interest rates than in US or Europe, frontier financial stocks are the counter-intuitive return boosts of the most successful managers.
THINK FOR YOURSELF
The main take that I want you to remember from this article is the prevalent independent thinking that top frontier investors are demonstrating.
By ignoring mature markets financial sector problems and focusing on the rising demographics of frontier markets, investors’ independent thinking gave them an edge over most investors.
Next time when your are considering an investment do not disregard it based solely on what other investors are doing. Is your research sound, but still need a confidence boost? Then bookmark this article full of independent thinking and re-read it for your confidence boost.
All content on DraculaCapital.com is for information purposes only. Do not use this content as investment recommendation. Every type of investment involves the risk off losing investment principal. Frontier Markets presents higher risks than mature markets.