Next Big Bet on World’s Poorest Put by Fund that Beat 91% of Peers

There is some good news for every one – well almost everyone: The world’s poorest consumers will get richer.

A top performing emerging markets fund in Norway is already being enriched by that as it bets on that assumption.

Over the last five years, the Holberg Rurik has managed to get a return of 30 percent, in dollars, as the company put its bets on a new consumer class in frontier markets such as Kenya, Tanzania and Vietnam. And according to data compiled by Bloomberg, that figure is better when compared to at least than 91 percent of its peers.

“They are in an early growth phase, in their most attractive economic phase through history. They’re smaller markets so there are fewer investors that look at them. You combine higher growth with lower pricing,” Leif Anders Fronningen, who manages the 420 million-krone ($49 million) fund at Holberg Fondsforvaltning AS, said in an interview in Oslo on Tuesday.

A broader drop in more mature emerging markets has been allowed to be skirted by Holberg’s by its dive into some of the world’s poorest nations. Falling commodity prices and high debt levels have dragged down a number of stocks in many developing economies.

While the MSCI frontier index is down 1.4 percent, over the past five years, the MSCI Emerging Markets Index, Holberg Rurik’s benchmark, is down 9 percent.

Credit penetration, or how much debt there is in an economy is one of the measures that the 34-year-old Fronningen and his partner, Harald Jermiassen, looked at. He said that while the “race is finished” in countries such as Turkey and South Africa, in many African countries, debt growth has just started.

Careful investment made in high quality, capital-light companies is the key to capturing that growth. The fund now holds a concentrated portfolio of 25 to 30 “high conviction” cases and typically, it finds three to four companies per country after a “tough screening process”. Among the biggest holdings of the fund are Nigerian lender Guaranty Trust Bank Plc, Naspers Ltd., and Vietnam Dairy Products JSC.

“We position ourselves for consumption, the domestic demand in the fastest growing economies. Good companies that are exposed to the story about the growing middle class,” he said.

Due to the potential of being significantly impacted by political risks, the fund managers clearly stay away from energy and commodity producers. According to Fronningenm when investing in frontier markets, they view weak institutions are the biggest drawback in general.

“There are much stronger arguments for active management in emerging markets than doing it in the U.S. These markets are generally much more inefficient. In the index there are a lot of strange things. Then you get oil companies, mining companies with the whole market,” he said.

(Adapted from Bloomberg)

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