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Frontier market allure builds as Schroders celebrates top percentile performance over 3 years

Despite the uncertain global macroeconomic backdrop, Schroders believes that the structural and the tactical case for an investment in frontier markets remains compelling driven by their many competitive advantages.


Despite the uncertain global macroeconomic backdrop, Schroders believes that the structural and the tactical case for an investment in frontier markets remains compelling driven by their many competitive advantages.

At the same time, Schroder ISF1 Frontier Markets Equity celebrates 3 years consistently outperforming its benchmark, the MSCI Frontier Markets index. Since fund inception in December 2010, the fund has returned 13.4% per annum and outperformed the index by 7.3% per annum. The strong performance profile is also reflected in competitor positioning as it is the best performing fund over one and three years to 31 March 20142.

Frontier economies have multiple growth drivers including favourable demographics, low labour cost and significant natural resource deposits. Moreover, many economies have more than one growth driver. For example, the Middle East is using oil revenues to diversify away from their reliance on oil but also has attractive demographics. Frontier markets’ strong organic growth drivers are less reliant on the developed world and this has attracted investors. It also results in correlations between frontier markets and with global emerging markets and the developed world being low.

Frontier markets are also supported by strong economic fundamentals because in aggregate they run current account surpluses, have low debt levels and large FX reserves. This, in combination with organic growth drivers, also helps insulate frontier markets from global macro uncertainty.

Frontier market stock markets were slow to recover from the global financial crisis and have lagged emerging and developed markets until more recently. Despite strong recent performance, valuations remain reasonably attractive. The MSCI Frontier Markets index is currently trading on around 11.5X PER3 which is at a small premium to the MSCI Emerging Markets index but is at a significant discount to developed markets. Frontier markets have consequently been attracting growing investor interest and subsequently strong inflows. However, few foreign international investors have exposure to these markets but an ongoing, gradual increase in equity issuance should help absorb flows which should improve liquidity and boost sentiment.

Allan Conway, Head of Global Emerging Market Equities, said:

“The structural case for frontier markets remains compelling. These markets are at an early stage of development and are expected to grow faster than emerging and developed economies, which is significant from an investment perspective since capital market liberalisation together with economic expansion can act as a key driver for long-term market returns.”

Carlo Trabattoni, Head of Pan-European Intermediary Distribution, commented:

“Frontier markets offer investors access to some of the most dynamic and fastest growing economies in the world. They currently offer attractive valuations for investors looking to diversify their investments and to capitalise on a combination of competitive advantages including multiple economic growth drivers and available capacity, which builds a case for exciting investment potential.”

Schroders has a dual approach to investing in Frontier Markets. The strategy targets alpha from both top-down analysis, guided by a proprietary quantitative country allocation model together with judgemental overlay, and bottom-up stock selection driven by fundamental stock analysis. Since inception both alpha drivers have contributed to performance, although stock selection has so far been particularly strong. Schroder ISF Frontier Markets Equity has the flexibility to invest in the wider frontier universe and approximately 30% of the portfolio is currently invested in non-benchmark positions, which have been strong sources of added value. One of the reasons why it is possible to generate such strong alpha in frontier markets is due to the inefficient nature of these markets and the fact that these markets are typically under-researched.

1 Schroder International Selection Fund is referred to as Schroder ISF

2 Source: Morningstar Direct from 15 December 2010 to 31 March 2014. A Acc in USD

3 Bloomberg as at 28 February 2014

For further information, please contact:

Georgina Robertson, International PR

Tel: +44 (0)20 7658 3365/

Kathryn Sutton, International PR

Tel: +44 (0)20 7658 5765/

Charlotte Banks, Intermediary PR

Tel: +44 (0)20 7658 2589/

Notes to Editors

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Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall.

The fund holds investments denominated in currencies other than sterling, changes in exchange rates will cause the value of these investments, and the income from them, to rise or fall.

Investors should be aware that frontier markets involve a higher degree of risk than emerging and developed markets. Less developed markets are generally less well regulated than the developed markets, investments may be less liquid and there may be less reliable arrangements for trading and settlement of the underlying holdings.

Schroders plc

Schroders is a global asset management company with £262.9 billion (EUR316.0 billion/$435.4 billion) under management as at 31 December 2013. Our clients are major financial institutions including pension funds, banks and insurance companies, local and public authorities, governments, charities, high net worth individuals and retail investors.

With one of the largest networks of offices of any dedicated asset management company, we operate from 37 offices in 27 countries across Europe, the Americas, Asia and the Middle East. Schroders has developed under stable ownership for over 200 years and long-term thinking governs our approach to investing, building client relationships and growing our business.

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