Frontier Markets: To boldly go where few investors have gone before!

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Frontier markets and the mutual funds and ETFs that invest in them are quickly becoming a separate and distinct asset class from emerging markets. If you’ve never heard of frontier markets, you’re not alone. They’ve only recently become the hot new investment. The WSJ described them as “next year’s darlings in emerging-market investing.” Recent developments suggest that at a minimum, frontier markets are worth keeping an eye on. I’ll briefly describe what frontier markets are, some recent developments in the creation of indexes to track frontier markets, and how you can invest in this risky asset class.

What are frontier markets?

Frontier markets describe the smallest, less developed, less liquid countries that make up emerging markets. As the WSJ described them, frontier markets are “generally understood to be the less liquid, small ‘emerging’ emerging markets.” Examples of frontier markets include Bulgaria, Croatia, Kazakhstan, Nigeria, Sri Lanka and Vietnam.

Do any indexes track frontier markets?

Yes. In October 2007 S&P launced its Select Frontier Index, which tracks 30 companies. Presently, the index is updated monthly, although S&P intends to begin updating it daily. Gathering data from companies in frontier markets proves to be extremely challenging, regardless of how flat one may view the world. S&P also offers the IFC Global Frontier Markets which tracks 270 companies. Year to date the index is up 28%; last year it was up 36%. To view more details about S&P’s Select Frontier Index, you can check out the S&P Select Frontier Fact Sheet (pdf). Here’s a breakdown of the index from the fact sheet:

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mcsibarrafrontier.pngMSCI Barra also has plans to launch a frontier markets index called the MSCI Frontier Markets Indices. The index will cover 19 countries. These 19 countries–shown to the right–cover Africa, Middle East, Asia and Central & Eastern Europe. You can find more information about the MSCI Barra Frontier Index here.

How can you invest in frontier markets?

The mutual funds that invest in frontier markets are still very limited. With the creation of the indexes, you can expect ETFs and eventually mutual funds to begin offering new investing alternatives. Here are two funds that currently offer exposure to frontier markets:

T. Rowe Price Africa & Middle East (TRAMX)

  • Ave. Market Cap: $4.5 billion
  • Expense Ratio: 1.75
  • Initial Investment: $2,500 ($1,000 for IRAs)
  • Fund Assets: $128 million


Eaton Vance Tax-Managed Emerging Markets (EITEX)

  • Average Market Cap: $1.4 billion
  • Expense Ratio: .95
  • Initial Investment: $50,000

Eaton Vance has had impressive returns. From 2003 its annual returns have been 62.7, 31.6, 33.8, 38.0 and 38.6. On a risk adjusted basis, however, the returns are less impressive, but 30+% is still 30+%. Of course, it won’t keep up this pace and the strong returns have to make you wonder whether the fund is in for some difficult years. In addition to these funds, many emerging market funds have some exposure to the frontier markets.

What are the risks of investing in frontier markets?

There are many risks associated with investing in frontier markets. Political instability in emerging countries present many risks to an investment. In these smaller frontier markets, liquidity is also a risk. The simple fact is that for periods of time, there may be no market for a stock in a frontier market company. The regulatory scheme within these countries varies and often provides far less oversight than in more developed countries. On a more positive note, some believe that frontier markets are less influenced by global conditions such as the current credit crunch. Regardless, frontier market funds are risky. If the Eaton Vance fund can rise more than 60% in one year, it can surely fall just as fast.

Am I buying a frontier market fund?

At this point, no. The options are just too few and too expensive. If Vanguard or Fidelity eventually offers a frontier fund, I’ll certainly consider moving a potion of my portfolio currently invested in emerging markets over to frontier markets. But for now, I’m on the sidelines watching.

Published or Updated: March 22, 2012
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Danfonds says:

    Hedge funds, like Danfonds Frontier Funds, may have the edge over ETF’s and passive funds mentioned in your good piece that correctly highlights the risks in frontier markets. The reason is, there is also index risk to consider. Do investors really want exposure to an ETF on the MSCI with 28.9% in Pakistan? Index liquidity requirements also tilt them towards financial stocks. This is clearly an area where hedge funds potentially have an advantage.

  2. Melvin Manchau says:

    Our firm is positioned to help investors interested in frontier markets.
    Bello & Manchau, Inc. (B&M) is the first and only political risk consultancy focusing exclusively on Africa. We help our clients navigate and manage the risk of doing business in Africa by closely monitoring and analyzing political, economic, security and social developments across the continent and forecasting the impact of these developments on a client’s bottom-line.

  3. Hermes says:

    I am plowing my money into frontier markets. There’s no point investing in Europe or America to get dismal 3% returns. If you’re young and willing to ride out the turbulence, frontier markets gives you high risk and high returns.

  4. John Loban says:

    I read today that Leopard Capital, based in Hong Kong, is launching “Leopard Asia Frontier Fund” which invests in Asian Frontier markets like: Bangladesh, Bhutan, Cambodia, Laos, Mongolia, Myanmar (Burma), Maldives, Papua New Guinea, Pakistan, Sri Lanka and Vietnam.

    Would consider investing in asian frontier markets generally today ?

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