The global investment landscape has changed dramatically over the last 20 years. It is predicted that by 2030, the US market will account for less than 25% of the global market. A common sense strategy might be to “diversify” and introduce international investments into your portfolio.
Investing in emerging and frontier markets is an effective diversification and risk strategy. What is the best way to invest and benefit from these opportunities remains a question.
Frontier markets are notorious “black holes” of misrepresentation and over-promised returns. At one end of the spectrum are the traditional institutional investors. At the other end are Boutique Investment Firms offering “hybrid” funds. Boutique Firms are nimble and managed by investors who bring hands-on practical experience and relationships from the countries in these markets.
Some hybrid structures blend private equity features with the protective characteristics of hedge funds. A boutique firm might create a capital pool company (CPC) to float APOs (alternative public offerings) on the Toronto stock exchange.
APOs are quick and less expensive than IPOs; perfect for taking African corporations public, good for an investor seeking transparency. Or, they might create a “pledge fund” to protect an investor’s capital before, during and after the placement of capital. Pledge funds take a portfolio approach to investing and go to great lengths to find proprietary opportunities to present to their investors.
Boutique firms are plugged into the private, public and independent wealth sectors of emerging and frontier market countries, and are intimately familiar with the “real” opportunities.
Take for example a recent opportunity in Ghana where an existing salt producer and marketer is seeking US investment. This unpublicized opportunity would be welcomed in an investment portfolio. Salt is a steady, well-documented reliable commodity.
What should you be looking for?
An exploding middle class and its appetite for consumable goods is driving emerging and frontier market growth. The surge in demand has a direct impact on the mining, oil & gas, technology, communications and education sectors. Boutique investment firms leverage the non-correlated nature of these assets & regions to provide extraordinary returns that are correctly balanced against risk.
Look for industries and sectors that are influenced by consumer appetites or the business need for innovation. Technical innovations in Africa are fueled by the entrepreneurial segment, e.g. apps to facilitate point of sale transactions in remote locations, the transfer of phone credits and other types of mobile money services for the under or “unbanked.”
What strategy should you adopt? When investing in these markets take a longer-term “patient money” strategy. Monitor your portfolio and adjust holdings accordingly. The recommendation is to allocate 25% – 45% of your portfolio to international investments for the best return.
Studies have shown that an allocation of as high as 60% for international investments can provide improving risk/return benefits. As with all financial matters, seek advice from a professional.