Five professional investors from four buyside firms believe that frontier markets have a greater opportunity set than emerging markets. They carry less risk (i.e. less volatile) and have less correlation with the developed world markets. According to Andrew Brudenell, portfolio manager at HSBC Global Asset Management, they are cheaper and have higher dividend yields. Chad Cleaver and Howard Schwab, portfolio managers at Driehaus Capital Management agree. In addition, the best opportunities are in small and mid cap stocks and in markets with native consumers. These ideas have outperformed the MSCI BRIC index handily. Since the summer of 2009, this index is flat or down slightly. Other customized indices based on the above investing themes include ASEAN index, ANDEAN index and a consumer stock index. The ASEAN index is comprised of Thailand, the Philippines and Indonesia. It is up 70% for the same timeframe. The ANDEAN index is comprised of stocks from Colombia, Peru and Chile and is up 65%. An index comprised of consumer discretionary and consumer staples securities (50%/50% split) is up 75%.
Kemal Ahmed, portfolio manager at Investec Asset Management, adds another wrinkle to the frontier markets theme. He has coined the term horizon markets which consists of frontier markets plus the 14 smaller countries in the MSCI Emerging Markets index. He calls them Smaller EM. The seven larger countries account for 80% of the index's capitalization and are called Large EM. The BRIC nations make up 60% of the index.
According to David Stein, chief investment officer at Parametric, the correlations within the frontier markets has remained low (approximately 0.3) while they have been rising between countries in the developed and emerging markets. While investing in a particular country in the frontier markets may be riskier, diversification among country risks should lead to safer and less volatile returns.
These factors make frontier markets a compelling alternative to a standard investment in the BRIC countries.
