Back in August Morgan Stanley launched its Frontier Emerging Markets Fund, (NYSE: FFD), a closed-end fund rather than an ETF which means that its price swings are based upon the premium or discount it trades at compared to its net asset values. The fund, which traded in September at $20, closed this week at $9.08.

James Upton, one of the fund’s senior portfolio specialists, told The Wall St. Journal’s MarketWatch that he looks for countries whose economies are growing “well above” 5% a year and that also have “a spirit of reform and transparency.” The fund follows stocks of 32 countries in which it can trade locally. In addition to bigger players in the Middle East and Asia, this list includes Jamaica, Trinidad & Tobago and several Eastern European countries including Bulgaria and the Ukraine. Ruchir Sharma (pictured right) is the Fund’s Managing Director. And albeit from September 17, 2008, I found the commentary on Morgan Stanley’s website in regards to FFD to be quite interesting in terms of how Sharma and Timothy Drinkall, the fund’s Executive Director, approach the makeup of their holdings:

Despite current volatility in global equity markets, both the economic fundamentals of the frontier markets as well as the long-term investment case for having equity exposure to frontier markets remain intact, in our view. Underpenetrated consumer markets and likely infrastructure development plans remain among the important components of how equity investors may benefit from having exposure to these countries.

Emerging Europe Frontier markets have been negatively impacted due to their export dependence on the EU economies, which are slowing markedly. The Ukraine has been one of the hardest hit markets, owing in large part to the collapse of its government.

By contrast, frontier markets in Asia have performed well as they had already sold off earlier this year (e.g., Vietnam) or because they benefit from falling commodities prices (e.g., Bangladesh).

The Middle Eastern markets have been weak, much of which is due to Ramadan (religious holiday) where locals have been less active market participants. As several of the GCC markets have had excellent performance year to date prior to the recent correction, some foreign funds have been net sellers to fund outflows.

The African markets have proved resilient, with solid outperformance particularly by Nigeria.

As a result of the market correction, we believe some attractive investment opportunities have been created in Frontier markets for further evaluation.

One of FFD’s holdings, Oando (NSE: OANDO), made headlines earlier this month when Vetiva Capital Management Limited analysts placed a “Buy” recommendation on the stock at its market price. Oando’s Q3, 2008 results showed an increase of about 14% and 56% respectively in its turnover and profit after tax respectively when compared with the corresponding quarter in the previous financial year. Also, the company disclosed that it will embark on the laying of over 124Km of gas pipelines in Akwa-Ibom State, following the successful completion of its GL3 project in Lagos. During the quarter, the company signed a strategic partnership agreement with a major Fast Moving Consumer Goods (FMCG) player, Big Treat Plc. Under the arrangement, Oando Marketing Limited, a subsidiary of Oando plc, offered 58 of its retail outlets to the confectionery business to expand its distribution base across Nigeria. A total of six retail outlets in Lagos are to be used in the initial stages of the expansion plan which started on September 25th before spreading across the country. This strategy is expected to boost the non-fuel revenue of the company, which accounted for about 28% of EBITDA in 2007.

FFD’s top ten holdings, and corresponding countries and sectors (where they might not be self-evident) as of the end of October:

National Bank of Kuwait 4.01
Hrvatski Telekom Dd (Croatia) 3.39
Ecobank Transnational Inc (Togo) 3.25
Oando plc (Nigeria; energy) 3.15
Krka Dd Novo Mesto (Slovenia; pharmaceuticals) 3.15
Commercial Bank of Kuwait 3.04
Copa Holdings S.A. (Panama; airline and cargo) 3.03
Mtn Group Ltd (South Africa; telecommunications) 2.96
Air Arabia (UAE) 2.95
Gulf International Services Os (Qatar; oil and gas) 2.63