Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Buying A Frontier Market Fund ? This Theater's Got A Teeny, Tiny Exit
"Vanguard Group estimates the one hour it takes to liquidate $100 million in emerging-markets expands to more than 10 days when you’re on the frontier. Being so small can have bad consequences, says Chris Philips, senior analyst at Vanguard Group, which doesn’t offer a frontier-market fund. For one thing, it can take funds a long time to move into and out of stocks. Mr. Philips calculated that a frontier-market fund would need more than 10 days to liquidate a $100 million position."
Considering WAFMX as an example: the entire fund is, rounding, some 700m, with a YTD return so far of 13.26%. Under what scenario would they feel compelled to liquidate 1/7 of the fund all at one time? Do you suppose that the manager(s) might have considered this in their calculations?
Reply to @Old_Joe: if there is market panic and investors start heading for exits in a hurry you might need to liquidate large portions of the portfolio to meet redemptions. Under normal market conditions this might not be an issue.
I think the more important point is that frontier markets are relatively illiquid and that means there could be very big NAV changes in case they come under selling pressure -- even if the fund itself isn't facing redemptions and is perfectly fine with holding the position.
Remember, mutual funds have to calculate their NAV at fair market value every day. If liquidity dries up and suddenly there are a lot of sellers and very few buyers, NAV is going to go very low, very quickly. (And once liquidity is restored, it could bounce back just as quickly.)
As a potential buyer and longer-term investor, I think I should be looking for this kind of volatility as an entry point. WAFMX has had some bumps lately and it's definitely looking more interesting than 3 months ago, but I expect there will be much better buying opportunities in the future.
I guess what I'm trying to say is something like this: I would be surprised if a large proportion of "average investors" stumble across a somewhat obscure fund such as WAFMX all on their own, and then proceed to invest large sums of money. I would bet that most investors in such a fund have been steered there by competent professional advisers such as Bob C. or perhaps by fairly sophisticated and balanced opinions such as are to be found here on MFO.
If that is so, it seems more likely than not that: • those investors have a pretty fair idea of the potential volatility • they understand that the "Frontier" is not the safest place in the world • such an investment would be a pretty small percentage of their overall portfolio • their advisers will attempt to calm them down • they would therefore perhaps be more inclined to wait out trouble rather than starting a mass panic for the door.
This may all prove to be whistling past the graveyard, but it's how I see things, at least for now.
Reply to @Old_Joe: I hope you are right. People tend to find obscure funds based on past performance. I hope you are right but I think time will show I am unfortunately right.
Having said that I do have a small position in WAFMX (~2.4% of total portfolio). One thing going in favor for this fund is that it is very heavy to Consumer Staples which are typically lower beta names. Dividend yield is also relatively high. So, it might hold up a little bit better but that is still a big if.
Comments
"Vanguard Group estimates the one hour it takes to liquidate $100 million in emerging-markets expands to more than 10 days when you’re on the frontier. Being so small can have bad consequences, says Chris Philips, senior analyst at Vanguard Group, which doesn’t offer a frontier-market fund. For one thing, it can take funds a long time to move into and out of stocks. Mr. Philips calculated that a frontier-market fund would need more than 10 days to liquidate a $100 million position."
Considering WAFMX as an example: the entire fund is, rounding, some 700m, with a YTD return so far of 13.26%. Under what scenario would they feel compelled to liquidate 1/7 of the fund all at one time? Do you suppose that the manager(s) might have considered this in their calculations?
Remember, mutual funds have to calculate their NAV at fair market value every day. If liquidity dries up and suddenly there are a lot of sellers and very few buyers, NAV is going to go very low, very quickly. (And once liquidity is restored, it could bounce back just as quickly.)
As a potential buyer and longer-term investor, I think I should be looking for this kind of volatility as an entry point. WAFMX has had some bumps lately and it's definitely looking more interesting than 3 months ago, but I expect there will be much better buying opportunities in the future.
If that is so, it seems more likely than not that:
• those investors have a pretty fair idea of the potential volatility
• they understand that the "Frontier" is not the safest place in the world
• such an investment would be a pretty small percentage of their overall portfolio
• their advisers will attempt to calm them down
• they would therefore perhaps be more inclined to wait out trouble rather than starting a mass panic for the door.
This may all prove to be whistling past the graveyard, but it's how I see things, at least for now.
Having said that I do have a small position in WAFMX (~2.4% of total portfolio). One thing going in favor for this fund is that it is very heavy to Consumer Staples which are typically lower beta names. Dividend yield is also relatively high. So, it might hold up a little bit better but that is still a big if.