[private]Frontier Equity markets have been under pressure during the 1st half of 2018 and the asset class is in the spotlight for many investors. We take the opportunity of a disappointing 2nd quarter to follow-up on the T. Rowe Price Frontier Markets Equity fund, to review the fund’s performance, the recent portfolio activity and positioning. We hope this update will give you better insights about the strategy to support investment decisions within your client’s portfolios.

Performance Review – 2nd quarter 2018

During the 2nd quarter of 2018, the T. Rowe Price Frontier Equity fund marginally outperformed the reference index by 22 basis points (I share class in USD). While relative performance has held up, driven by successful stock selection within Argentina and Vietnam, on an absolute basis the Fund is down -14.8% (I share class in USD).

The market weakness derived mainly from Argentina which has been under pressure from a weakened Peso, driven by fears over inflation’s trend not coming down fast enough and fiscal progress. However, Oliver Bell, lead Portfolio Manager (PM) maintains a longer-term positive stance on the country. He is gently optimistic about the market eventually stabilizing with help from the IMF and the good news about its likely reclassification to the MSCI Emerging Markets (EM) Index in 2019.

In terms of individual contributors on an absolute basis, Argentinian stocks had the biggest negative impact (although on a relative basis the fund was up against the local index due to positive stock selection). Financials have been weak, with the large holding in Grupo Galicia impactful, along with smaller bank, Grupo Supervielle. The investment team took advantage of this weakness to top up the bet in Grupo Galicia as they remain confident in the long-term investment case. Reasons supporting it are namely its leading market position with exposure to underpenetrated credit levels, thus driving loan growth, and the bank is led by a quality management team with a strong balance sheet.

Away from the Argentinian market, exposure to Vietnamese stocks has also been disappointing on an absolute basis (again positive stock selection meant the fund was up on a relative basis). The market has been subject to some profit-taking this year after a long market rally, but again they remain positive about opportunities, especially as valuations now look reasonable and fundamentals look good.

Year-to-date, the fund has outperformed the reference index by 52 basis points, as of June 30th. On an absolute basis, results have been a tale of two halves, the 1st quarter being particularly strong for the strategy, up 5.5% (I share class in USD), with the weakness concentrated in the 2nd quarter, as detailed above. Lead PM expects Frontier asset class performance to move steadily upwards over the coming years as individual economies make meaningful improvements, however the trajectory is not a straight line and he reiterates the importance of viewing Frontier Markets as a longer-term investment.

Positioning

Although the fund is mainly focused on bottom-up stock picking, the investment team pays close attention to what is happening at a broader level. They have been using the weakness in Argentina to selectively top up certain bets, focusing on liquidity and quality, and the fund is now slightly overweight in this country.

They remain positive about Saudi Arabian bets and this position has played out well over the 2nd quarter given support from a stronger oil price and the MSCI reclassification news.

The outlook on Africa remains bullish, as key economies Nigeria and Kenya are making significant improvements. In Nigeria, the currency is increasingly functioning better, and oil production has ticked up, while in Kenya the currency has been very stable despite pressure to wider EM currencies.

Sri Lanka is another market where the outlook is positive, especially on the banking sector. In this area the fund is positioned with bets in Commercial Bank of Ceylon and Hatton National Bank.

Trading

The investment team has been taking advantage of some attractive entry points in select Argentinian stocks to increase the bets in high quality, and relatively more liquid names. Grupo Galicia is a prime example, as is Telecom Argentina: they added Argentina’s top cable and wireless operator, taking advantage of an attractive entry point. The company continues to integrate following its merger with Cablevision and the thesis of synergies, a supportive market structure and a market-friendly regulator continue to play out.

In terms of new positions initiated during the quarter, Vivo Energy has been bought, this is a retailer and marketer of Shell-branded fuels and lubricants, which IPO’d in May 2018. The group has successfully built a reasonably sized, fast-growing business with the backing of the world’s largest independent oil trader, Vitol, which was also the majority shareholder of Vivo pre-IPO. Oliver Bell believes that the risk reward looks favorable going forward as Vivo is expanding its highly cash-generative business across Africa’s underpenetrated, high growth markets.[/private]