Like the emerging markets, which came into focus around the late 1980s, a new subset of rapidly developing countries known as frontier markets is garnering increased attention from the institutional investment community. Frontier markets offer an opportunity to invest in growth characteristics and economic environments very different from those of more developed countries. But frontier economies also can be politically, culturally and economically unstable, sometimes resulting in volatile returns.
This issue of Investment Focus discusses frontier markets in some detail, including key traits that distinguish them from emerging and developed markets. It also examines the various methods used by index providers to categorize frontier markets, noting how the different classifications have caused material performance variances between indices. The article explores the advantages of investing in frontier markets, such as lower correlations, less expensive valuations and higher yields than more developed markets. It also describes the downsides, including sometimes-volatile returns, foreign ownership constraints, illiquidity and high fees.
The publication concludes with a discussion of Segal Rogerscasey Canada's belief that the downside of frontier markets investing may outweigh the upside potential for many investors. The firm recommends that the majority of investors allow emerging markets managers to invest opportunistically in frontier markets, an approach that allows for some exposure to frontier markets while mitigating the risks.
Download the full Investment Focus as a PDF from the link at the bottom of this page.
For a two-page discussion of key points made in the Investment Focus, see Segal Rogerscasey Canada's June 2014 Investment Brief, "Exploring New Terrain: The Promise and Pitfalls of Frontier Markets."