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Folksam Sees Opportunity for ESG Engagement in Frontier Funds

Stockholm (Ekonamik) – “We find frontier markets interesting. They are perhaps more focused on domestic economy compared to EM funds, so they complement each other,” says Susanne Bolin Gärtner Head of Fund Selection & ESG External Funds at Swedish insurance and pension cooperative, Folksam.

Among the various choices available to pension savers, Folksam’s customers can gain exposure to frontier markets by investing in Schroder ISF Frntr Mkts Eq A Acc SEK. This Fund is benchmarked against MSCI Frontier Markets index, which it seeks to outperform by 2.5% per year via a mix of quantitative analysis (top-down) and fundamental analysis (bottom-up), each of which should contribute half of the excess return. According to the fund description, “the quantitative part is based on two proprietary models and is used to identify the most attractive countries. Local analysts run the fundamental equity analysis.” Most of the fund’s investments (70.8%) are located in Northern Africa (Egypt represents 16.6%) and the Middle East (Kuwait represents 32.5% and the UAE another 9.2%), with another 13.5% focused on Asia ex-Japan, mainly in Vietnam.

“We have had this fund for a long time now. We chose it because of good performance among its peers at the time, and we believed the fund would continue to perform over time,” the fund selector says. However, the fund has struggled since the middle of 2017, when it started underperforming the benchmark. “We have been satisfied,” Bolin Gärtner comments of the fund’s performance. “With active funds, we do try to think long term and understand underperformance. If the fund continues to underperform, we monitor it more closely and add it to our watchlist. If an issue persists we will eventually replace it with another fund in the peer group,” says the fund selector.

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“One issue with this fund is its size.” Folksam’s approach also means they will continue to be selective. “As we offer a guided selection of funds, we do not intend to offer more than one frontier fund. We used to offer an Africa fund, but due to tobacco exposure, we had to divest.”

“I have noticed some new exciting markets becoming available over time, such as Vietnam,” Bolin Gärtner says when asked about some of the most interesting developments she has witnessed in this market segment throughout her career. “A long time ago, Ukraine was a popular market. I guess that since then we learned that exciting markets are better in a broader portfolio like frontier markets,” she cautions.

“I also notice that ESG is becoming a focus even in this region. Here, there may be some mispricing too due to lack of understanding of how to fill out sustainability report, for example. So there is room for dialogue and engagement with companies and asset managers.”

As was the case with Alternatives, ESG appears to be a feature in strong demand and an important factor going forward. “We will continue to offer frontier market funds, but we would like to see more ESG integrated into the process and also exclusion from tobacco.”

Image courtesy of Folksam

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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