Frontier Markets

Frontier Markets

Are you investing in foreign markets? Do you feel the US markets are just too expensive? Do you also feel that emerging markets are just not there anymore? Well, if you believe any of these may be the case I have an alternative for you that may make overseas investing a little easier and more beneficial. In previous posts, I have suggested emerging markets as an alternative to investing solely in US markets. While I still feel that these markets do offer some great opportunities as they have been down pretty much since 2010 their comeback may not be as swift. And as many think the US markets are poised for a correction at some point although no one knows what is certain in any of the markets anywhere. So what is the alternative? Let me introduce you to the Frontier Markets.
Emerging markets are mainly centered on the BRIC countries (Brazil, Russia, India, and China) and many other developing nations similar to the BRIC core countries. But frontier markets are those markets that are moving towards emerging market status and are mainly centered in and on South Asia, Africa, Eastern Europe and the Middle East. And over the past five years these markets have outpaced the emerging markets three of the five years. One reason the frontier markets have gained in popularity is because they are now considered safer to invest in as they have become more stable with their internal issues. Politically these markets are now as volatile as they were in the 2000’s and with stability will inevitably come investment. That does not mean that these new investment choices are without risk because they are still considered a risky investment. The key is to buy a well-diversified fund that can spread the risk around to many of the countries considered frontier markets.

While it is still difficult to invest in frontier markets due to the fact not many funds exist today that focus on these hidden gems. But they are there is you look and do your due diligence homework on the fund you wish to invest in. ETF’s and mutual funds provide the best opportunities to invest in frontier markets, but these funds are all not created equally. It is important to avoid funds that focus on one of the frontier market segments such as the Middle East or Africa. Instead, look for a fund that invests across all of the frontier markets to reduce your risk and the fund’s volatility. Also, by investing abroad in either a frontier market or emerging market can reduce your portfolio’s overall risk as well. While this is not a new idea, it is one that has been tested over time and has proven to be correct.

Why invest in frontier markets you may be asking? Well, seven of the ten fastest-growing economies in the world in 2014 were in Africa and, in essence, the entire content is considered a frontier market. And back to the diversity of these markets they do not appear to be as interdependent as emerging markets. Frontier markets tend to act more independent than emerging markets due to their basic nature and structure. Examples can be seen in Brazil, a country that exports natural resources mainly to China who is not importing as much as it was five or six years ago. Russia relies heavily on oil and is currently embattled with political risks. Frontier markets do have political risks, but these countries have stabilized to a great deal over the last five years to provide some outstanding returns to a few lucky investors.

Now when investing in frontier markets you will be looking for smaller funds, generally under a billion in assets at present. And there are few to choose from as well due to the fact it is difficult to start funds that invest in these much smaller markets around the world. So basically you are looking at small funds that have a high degree of difficulty with new entries so research the ones available and pick one that fits your investment strategy and your risk tolerance.

Now an indexed fund that invests in the frontier markets can have fees ranging from 0.58% to 1.01% while active managed funds range from 1.35% to 2.45%. Now as a rule I would recommend a passively managed fund to save on the fees but in the case of these newer frontier market funds I must admit that actively managed funds may be the better investment and having a knowledgeable manager to guide the fund through the variety of markets is worth the extra fees. As actively managed funds have outperformed passive funds in the frontier markets by a considerable margin thus making the actively managed fund the better option.

Do not shy away from foreign investments now when they are priced considerably lower than US equities. The average P/E for a US equity is 17 while foreign equities are much lower at present. Emerging markets do provide a good investment option for the long haul, but frontier markets offer much better returns today, and it does not seem that will be changing in the near term.

Look at frontier markets to diversify your portfolio after you do your due diligence. If you have any questions or need further information, do not hesitate to contact me.

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