Prologue

Photography by Gabriel Rotich, A24 Media

"One's destination is never a place but a new way of looking at things."

Henry Miller

Where's the best place in the world to put your money?

So far this decade, it's a country deemed so doomed it's listed with the ten most fragile states; a place where modern-day slavery, violence and the breakdown of law and order rank it among the three worst hellholes on the planet.1-4

Between deadly attacks by the Taliban, strikes by US drones and the secret missions to monitor Osama bin Laden, shares in Karachi soared, extending 1000% gains this century.5

It's not just Pakistan.

In the face of terror and global economic shocks, some of the biggest investment rewards are turning up in the most vulnerable of places. Assets in impoverished, radicalized or seemingly impenetrable corners of the world are often wildly discounted. Even a glimmer of hope for political stability or improvement in the economy can spark a major rally (Table 0.1).

Table 0.1 Plucky seven

Best performing primary equity indexes this decade Index Return Karachi 100 index 176% Dubai Financial Market 149% Philippine SE Index 145% Stock Exchange of Thailand 120% OMX Copenhagen 20 95% Qatar Exchange Index 92% Nairobi All Share 92% Best performing primary equity indexes this millennium Index Return Mongolia Stock Exchange Top 20 Index 3207% Montenegro Stock Exchange 1237% Colombia Colcap Index 1113% Karachi 100 Index 1028% Qatar Exchange Index 894% Peru Lima General Index 890% Kazakhstan KASE Stock Exchange 689%

Note: Data compiled by Bloomberg as of December 2014. Table excludes Venezuela Stock Market Index and Lusaka Stock Exchange All Share Index because of restrictions on repatriating foreign-currency returns or data constraints. Base currency: US dollar. (Function: WEIS GO).

At one time such countries were looked upon as exotic by a few -investors while mostly dismissed as basket cases. Now they form a -growing -investment universe known as the frontier markets - a gateway before the more -mainstream emerging and developed markets that have trillions of -dollars of investment funds competing to buy assets. While some rank as frontier because they have restrictive investment laws or tiny markets, most are poor or riven by conflict.

So how can investors tell which of these frontier markets will be the ones to take off? What are the signs the smartest money managers look for?

Armed with a spreadsheet of the emerging market and frontier funds that achieved some of the best returns for their categories in the past five and ten years, I began ringing around. I put three questions to each of the -investors: Which frontier markets do you favor most for the next five to ten years? When are you visiting these countries? And can I come along?

The result was a crazy schedule to fit with ten busy diaries, crisscrossing from Africa to Asia, Europe and Latin America, returning to Asia and Africa, then onto the Middle East, back to Asia before winding up once again in Africa (Table 0.2).

Table 0.2 The money managers and their pick of countries

Destination Portfolio Manager Participating Company & Assets in Emerging Markets Emerging Market Funds Performance & Peer Ranking Kenya Brett Rowley TCW Group, California
$11 billion TCW Emerging Markets Income Fund 3rd highest total return among 278 US-registered global emerging market fixed income funds over 10 years at 175% (annualized 10.6%) Myanmar Howie Schwab Driehaus Capital Management
$3.5 billion Driehaus Emerging Markets Growth Fund 6th highest total return among 638 US-registered emerging market equity funds over 10 years at 287% (annualized 14.5%) Romania Andras Szalkai Raiffeisen Capital Management
$2.5 billion Raiffeisen Emerging Markets-Aktien 2nd highest total return among 467 European Union-registered global emerging market funds over 5 years at 221% (annualized 26.2%) Argentina Julian Adams Adelante Adelante Emerging Debt Fund 2nd highest total return among 33 offshore-domiciled global emerging market debt funds over 5 years until liquidation at 52% (annualized 8.8%) Vietnam Mark Mobius Templeton Asset Management
> $40 billion Templeton Emerging Markets Investment Trust 2nd highest total return among 46 global emerging market investment trusts over 10 years at 360% (annualized 16.5%) Nigeria Kevin Daly Aberdeen Asset Management
$13 billion Aberdeen Global Select Emerging Markets Bond Fund 35th highest total return among 3033 offshore emerging market funds over 5 years at 85% (annualized 13.1%) Egypt Andrew Stobart Baillie Gifford
$12 billion Baillie Gifford Emerging Markets Growth Fund 14th highest total return among 636 UK-registered global emerging market funds over 10 years at 301% (annualized 14.9%) Saudi Arabia Sean Taylor Deutsche Asset & Wealth Management
$10 billion DWS Top Asien Fund 27th highest total return among 986 Asia Pacific equity funds over 10 years at 118% (annualized 8.1%) Sri Lanka Timothy Drinkall Morgan Stanley
$25 billion Morgan Stanley Galaxy Frontier Emerging Markets Fund 21st highest total return among 2571 offshore-domiciled global emerging market funds over 5 years at 118% (annualized 16.9%) Ghana Derrick Irwin Wells Fargo Asset Management
$12.4 billion Wells Fargo Advantage Emerging Markets Equity Fund 17th highest total return among 638 US-registered emerging market stock funds over 10 years at 253% (annualized 13.4%)

Source: Data compiled by Bloomberg as of June 2014

As the poorest continent, and consequently the region offering the -fastest potential economic growth, Africa accounts for four of the ten countries selected by the investors. At the most basic, it's a story of populations being lifted from subsistence living, and starting to consume the goods and services that drive the cycle of wealth creation.

But as we hop from democracy to autocracy, communist to Islamic regime, there's another ideal too - that broader economic and social -inclusion can ultimately help give people a political voice.

An English financier summed it up after his Vietnamese wife came off her scooter in a crater in the road. Imagine the stink you'd cause over these potholes in England, we mused. But that's the difference in frontier markets, he said. Because hardly anyone pays direct taxes, they don't feel the same right to complain. The more a country taxes or borrows from its citizens, the more accountable it needs to be. And not just for the state of roads but for healthcare, corruption, human rights.

Rather than a comprehensive study of each country - there are countless admirably detailed works6 to choose from for each of the 10 - this book is intended as a more practical view of realities on the ground, first from my own experience and then from the perspective of the investor.

With a different top-performing money manager in each country, we observe a range of investment approaches and their application, drawing from -interviews with government ministers, central bankers and corporate leaders. After each meeting, the investors provide their "bottom line" analysis of the potential, -followed by the events or "triggers" that would make them buy or sell.

At the back of the book is a ranking from the money managers of all of the countries and the stocks and bonds highlighted, along with summary notes and conclusions. We'll be tracking the investments with updates on the latest news at www.frontierfunds.org and on Twitter at @frontierfunds.

But first, we start at the beginning, with a guide to what constitutes frontier from the grandfather of emerging market investing, Mark Mobius.

Endnotes

1. Anonymous...