Mobius Shuts Frontier Fund to New Investors on Record Inflow – Bloomberg 09-25-13

Salient to Investors:

The Templeton Frontier Markets Fund closed its fund to new money, as record cash inflows turned frontier markets into the world’s best performers in 2013 – the MSCI Frontier Markets Index is up 13 percent in 2013 versus a 4.6 percent drop in the MSCI Emerging Markets Index.

Mark Mobius at Templeton Emerging Markets said the money was coming in too fast, but the market remains very buoyant and the opportunity longer term is still very, very good.  The Templeton Frontier Markets Fund had its biggest holdings in Saudi Arabia and Nigeria at the end of July, and its largest industry positions were financial and telecom stocks.

EPFR Global said funds that invest in frontier countries recorded $3.24 billion of inflows in 2013 through last week versus $879 million net inflows in 2012 and the previous annual record of $3.07 billion in 2010. Emerging-market funds had $13.7 billion of net outflows in 2013 through August.

Bloomberg said frontier nations accounted for 6 of the 7 biggest gains among global equity indexes this year and the MSCI frontier index is poised to advance during a year of losses in the emerging index for the first time on record.

Growing corporate profits, dividends and current-account surpluses have made frontier countries resilient to investor concern over Fed tapering.

 Tim Drinkall at Morgan Stanley Investment Mgmt said frontier-market equities will continue to outperform and continue to attract inflows as the asset class matures, by way of more liquidity in local markets and more investable products for institutional investors.

Sean Wilson at LR Global Partners said investors have realized that the growth story in traditional emerging markets has run its course, while frontier markets are only now being discovered by the broader investment community, and offer what traditional emerging markets offered 20 years ago.

Paul Herber at Forward Mgmt said investors are piling into frontier markets because of their growth prospects.

Lower trading volumes in frontier markets make it costly for investors to exit their positions. Andy Brown at Aberdeen Asset Mgmt said that given the liquidity in the market, the booms and busts could be even stronger than you would find in emerging markets.

Per-share earnings in the frontier index have increased 14 percent during the past 2 years versus an 11 percent drop in the emerging index. The frontier market index has a 4 percent dividend yield and is valued at 12.1 times reported earnings, versus a 2.7 percent yield and 11.9 times earnings for the emerging market index.

The IMF said current-account surpluses in frontier countries will grow to an average 3.4 percent of GDP in 2013 versus 3.1 percent in 2012 versus a deficit of 1 percent for emerging nations.

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Contrarian Manager Wins by Buying Newspapers, Avoiding China – Bloomberg 09-13-12

Salient to Investors:

Contrarian fund manager Bill Smead is:

  • Bullish on the U.S. but bearish on companies exposed to China. Looks for strong balance sheets, industries with high barriers to entry, long histories of profits and dividends, p/e ratios below their 10-year average, strong insider ownership, and shareholder friendliness with regard to allocating capital.
  • Likes U.S. companies with addicted customer bases – they benefit most from an improving economy. The U.S. began fixing its credit problems over four years ago, Europe’s 1½ years ago, China’s is just starting.
  • Along with Warren Buffett, likes newspaper stocks which are so lowly valued that they only need to survive five years to payoff.
  • Dislikes capital-intensive sectors that require lots of debt and equity to grow, like utilities, telephones, industrials, basic materials and energy, which do well when interest rates are low and borrowing is cheap but do badly as rates rise and borrowing becomes expensive. As rates rise over the next 20 years, capital-intensive businesses will be valued dramatically lower, including energy, basic materials and heavy industrials which will also be damaged by a hard landing in China.
  • China is like the U.S. was in the 19th century – the U.S. grew 9 percent compounded from 1800 to 1900 but endured 18 recessions, three depressions and three all-out panics, and a Civil War. China is comparable to the biggest of those four-year depressions. The bust comes when lenders don’t get paid back.
  • Likes financials because they are cheap and because the big banks own a lot of housing so will benefit when the 85 million baby boomer kids get married and  buy houses.

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