Institutional Investor's Alpha Magazine - September 2008 - (Page 44)

Frontier Investing O n an investment research trip to Kazakhstan in 1998, Adam Weiner decided in the spirit of adventure to take a side trip to Astana, the then–newly renamed and barely known national capital. Astana, as it turned out, was in the middle of nowhere, and airline service was practically nonexistent. Weiner, a London-based emerging-markets trading strategist for Chase Manhattan International at the time, made the journey on a chartered propeller plane. What he found following a particularly bumpy landing, he says, was “a city with beautiful modern buildings, roads and monuments — but almost completely devoid of people,” leaving him with a feeling of eerie desolation. “It seemed like a futuristic city on a distant planet.” A decade later, Weiner is managing an emerging-markets strategy for FrontPoint Partners, a $10 billion Greenwich, Connecticut–based investment ﬁrm acquired by Morgan Stanley in 2006. As for Kazakhstan, the former Soviet republic has begun to blossom. Astana, in fact, is thriving: The capital’s population has more than doubled in the past decade, to wan as well as in several Latin American countries. “But in our view prospects are good over the long term.” Gerken says that one way to mitigate risk, and to maximize returns, in frontier markets is to invest in both public and private securities. “If you know the markets well and the people who you are dealing with — especially if you invest in asset classes like real estate, commodities or nonpublic companies — your chances of succeeding are far greater,” he adds. Gerken should know. He has invested in frontier markets since the mid-1970s, when he began his career as an analyst and portfolio manager with London-based GT Capital Management, a pioneer in the sector. Part of the beauty of frontier markets is that their returns are not correlated with those of emerging markets. In fact, their returns are generally not even correlated with one another. That’s important, says Gerken, because it creates the opportunity to ﬁnd alpha anytime and anywhere. In January, for example, when most emerging markets were down 5 to 20 percent as part of the global equity meltdown, the market in Mongolia was up 5 percent. Cliff Quisenberry, founder of Investment Frontiers Research, a University Place, Washington–based firm that advises institutional clients on frontier and emerging markets, says that frontier markets have consistently outperformed developed markets. For the ﬁve-year period ended July 31, the S&P/IFC frontier market index had an average annualized return of 31.5 percent, compared with 7.6 percent for the Standard & Poor’s 500 stock index. “Until a few years ago, frontier investing in subSaharan Africa and Eurasia was the bailiwick of a few dedicated funds,” says Quisenberry, who was a portfolio manager at the Eaton Vance Tax-Managed Emerging Markets Fund from 1994 to 2007. “Now it has very much entered the mainstream.” Frontier investing probably won’t appeal to hedge fund managers who like to short stocks or trade frequently. “You can’t short these markets,” says New York–based Terrence Gray, a lead portfolio manager for DB Advisors, Deutsche Bank’s institutional asset manager. “You have to be on the long side, and you can’t get out in two days.” Like Gerken, Gray invests in both publicly traded companies and private equity deals in frontier markets. 600,000, and Astana Finance, a publicly traded ﬁnancial services powerhouse founded in 1999, serves as the conduit into the area for foreign investors. It is “one of the largest and strongest ﬁ nancial institutions in Kazakhstan,” Weiner says. Once the narrow purview of a handful of far-reaching portfolio managers like Weiner, countries like Kazakhstan, Kuwait, Nigeria and Zambia have drawn broader interest of late among hedge funds whose investments in geographically exotic locales previously were limited largely to the BRIC countries — Brazil, Russia, India and China. Now as most emerging markets struggle in the wake of the global credit crisis, money is moving to these new frontiers, in particular the markets of the oil-rich Middle East and North Africa (MENA) countries, resource-rich sub-Saharan Africa and the emerging “Stans” of Eurasia: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Managers say these markets — the once disdained stepsisters to more-attractive emerging markets — offer a measure of alpha that can’t be found elsewhere. Investing in frontier markets is not without risk, of course. Political development is often choppy, and stability is sometimes abruptly interrupted, as evidenced by Georgia, a former member of the Soviet Union whose conﬂict with Moscow had stewed for years before ﬁnally erupting in August, with Russia’s retaliatory invasion. Such events can take many — and often unpredictable — forms: Rebel forces in Nigeria recently attacked oil pipelines and kidnapped foreign workers in the West African nation, and insurgents in Côte d’Ivoire killed security personnel at a gold mining company in that country. “You have more of an event risk in frontier markets than in developing markets,” says Weiner, who joined FrontPoint as managing director and senior portfolio manager in August 2007 after more than a decade at OppenheimerFunds, JPMorgan Chase & Co., ING Barings and PaineWebber International. “There’s no question that these foreign markets remain risky,” notes Louis Gerken, founder, chairman and CIO of San Francisco–based Gerken Capital Associates, which manages $1.5 billion in assets and was an early investor in such emerging markets as China, Hong Kong and Tai44 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008 OIL FIELD, PREVIOUS SPREAD: ERIC LALMAND/PHOTO NEWS/GAMMA

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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