MSCI Frontier Markets Index Leaves Emerging Markets In the Dust

The MSCI Frontier Markets Index, during its short life, has outperformed the MSCI Emerging Markets Index and China (FXI) or (GCX), India (IIF) or (IFN), Brazil (EWZ) and Russia (RSX) individually.

The frontier market category is only recently formalized by the major index companies, and there are few frontier funds. T.Rowe Price offers a frontier markets fund relating to the Middle East and Africa [TRAMX] which we find more interesting than some others at this time.

We began discussing frontier markets late in 2007, after MSCI and S&P launched their frontier market indices. The availability of indices will surely increase related funds availability. Investors would do well to begin to familiarize themselves with frontier market investment issues.

Those markets are quite small, and thinly traded with the potential for extreme volatility and illiquidity when you need it most. Nonetheless, for some investors, a dash of frontier market exposure might be like adding some Tabasco sauce to a dish for extra flavor and a bit of kick.

Comments

[Keii]

Hi Richard,

Would you know if Fidelity or other companies offer trackers/ETFs for MSCI's Emerging and Frontier Markets (EFM)? I haven't been able to find anything regarding individual investing in the indexes.

Thanks!

[My Two Cents]

Very good article and graph - Thanks.

[NestV]

I hope that powershares introduce the frontier market ETF quickly. They already launched one in Europe.

[oldetimer]

Am I missing something? Is there a Frontier Markets ETF at present, and if so, what is its symbol?

[Aquater]

Not much point in touting something where no instrument for actual investing is available. The least the author could do is point out when and where actual investment opportunity will be available.

[Mr. T]

I agree with aquater how can something be better than something like EWZ when it is not even available to invest or is this chart from individual markets of those "frontier" markets. Can the author please point out where to invest if one wanted to.

[AAI]

"Frontier" markets by nature nature aren't easily accessible to retail investors, and not even very liquid to experts (think Lewis & Clark) like small institutions who work hard at it. But they're getting a bit more so, if you're willing to spend several long days filling out brokerage applications for stock markets like in Ghana and Kenya, then risking problems such as lack of standard paper trails, and, oh yes, high valuations as many hedgies are trying to get through these keyholes.

[Richard Shaw]

Aquater and Mr. T:

Gentlemen, I did in fact recommend a specific fund that invests in the Middle East portion of Frontier markets -- TRAMX.

As money floods into that part of the world, due to the high price of oil, those countries and the companies in them are growing rapidly.

The graph is of the MSCI Frontier Markets composite index.

There are three areas within the frontier markets as defined by MSCI --- basically Middle East, Africa and Eastern/Central Europe. Year-to-date Africa is doing best, Middle East second best and Eastern/Central Europe a poor third.

TRAMX invests in the better two of the three, but mostly Middle East. I do hope that helps you understand why I recommended it as I did.

Yes, there is limited set of options for pure frontier market funds today, but that is and will be changing. The lack of many pure frontier market choices is not a reason to avoid publication. A thoughtful approach to investing often involves researching situations before they become available – good fortune favors a prepared mind.

I understand Deutsche Bank is offering frontier fund product in Europe now; and reports are that Barclays may be launching a frontier fund in the US based on the MSCI Frontier Market index.

If you would like to know about larger individual companies in frontier markets (not recommended as direct investments, but useful to help understand the underlying holdings in funds you may purchase now or later), you can read other articles I have posted on my blog at QVMgroup.com/invest

There are several mutual funds that have a smattering of frontier market exposure, but not enough to warrant an allocation to the category. Seeking Alpha also does not publish articles that focus on mutual funds as a matter of editorial policy

Some funds are more name hype than reality, such as a Russia and Eastern Europe fund that is primary invested in Russia.

However, the direct response to your criticism of the article is that you didn’t really read it. I named and recommended a frontier market fund that I hold in my own account -- TRAMX from T. Rowe Price. It is a good way now to enter the Middle East component of the frontier markets, but only after you understand the risk factors, not the least of which is the extremely thin trading volume and possible liquidity squeezes that could result if investors shift their interest.

My principal recommendation is that you begin to familiarize yourself with frontier markets so that when the several likely future offerings become available, you can make an informed decision and not simply jump in. Now is a good time to study the opportunity when few investment options exist, because that is a time when your rational side will more likely rule over your emotional side.

Richard Shaw, Author

[Aly-Khan Satchu]

Its a perfect storm for Frontier markets and especially SSA Equities. As an asset class, Folk tend see the markets through a Bob Geldof Live Aid prism and this lack of perception means there is enormous value. The African continent is growing at its fastest rate since most Countries got their Independence. In Kenya, the State replayed Thatcherism. They started selling shares in what were previously mismanaged and bloated Government Parastatals, for example. These companies became profitable and Investors have reaped a very handsome reward. The State has a win win, instead of writing subsidy cheques, The Exchequer is receiving dividend cheques. The swing effect is material. Investors have found a taste for the Stock Market. Domestic demand did not exist before. In Kenya, we are launching our biggest IPO [Safaricom Mobile phone company] in our history. A million new shareholders are likely to enter the market. These are not small things. These markets are in a sweet spot.

Aly-Khan Satchu
rich.co.ke

[ShadowRider]

I'm interested in TRAMX (T.Rowe Africa & MidEast Fund) but when I looked at the portfolio it seemed like over 90% of their portfolio was concentrated in the Middle East, and a small sliver in Africa, of which the lion's share was South Africa. What about West African and East African economies like Kenya, Tanzania, Ghana, Ivory Coast, Angola, Swaziland, Botswana, etc ? I would like to see more SubSaharan investments in their portfolio, because those are the true frontier markets and that is where there is most long term future growth potential. Any idea when we might see these as part of the T.Rowe fund ?

A British company launched a fund called the Heart of Africa fund, which invests only in the SubSaharan markets.
www.newstaram.com/uk/financial-adviser/f... /
Why don't we see something like the Heart of Africa Fund here in the US ?

[Kenster]

From IndexUniverse:

"Claymore has filed with the SEC to create an ETF tracking frontier markets. Currently, there are no frontier ETFs trading on U.S. exchanges, although the area has been getting more attention lately and frontier market ETFs recently launched in Europe.

The Claymore/BNY Frontier Select DR Index Fund would track an index from the Bank of New York that includes 26 companies selected from a universe that covers nearly 40 frontier markets. The index includes only companies with float-adjusted market capitalizations of more than $100 million that have depositary receipts that trade on U.S. exchanges or the Luxembourg Stock Exchange."

Prospectus:

The Bank of New York, the Fund's index provider ("BNY" or the "Index
Provider"), currently defines Frontier Market countries as: Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, United Arab Emirates, Egypt, Ghana, Kenya, Malawi, Mauritius, Morocco, Nigeria, Tunisia, Zimbabwe, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Kazakhstan, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, Ukraine, Bangladesh, Pakistan, Papua New Guinea, Sri
Lanka, Vietnam, Ecuador, Jamaica, Panama and Trinidad & Tobago. The universe of potential constituents includes all liquid ADRs and GDRs which meet the criteria set forth under "Index Construction" with respect to trading volume, market capitalization and price.

[Phil in Oklahoma]

I just thought I would add that I bought into the TRAMX fund at $10.40 last Aug or Sept and have realized a 34.62% return as of today. I wish I would have invested a bigger chunk back then but it was considered highly risky and not something that should be taken seriously. I've also just been to Iraq for a military tour and wonder what the funds really help build or create over there. Isn't Haliburton a Middle East fund now? Twisted!
The reality though is we are a big World and most everyone is striving to see a brighter future. TRAMX can only grow as oil profits soar and funds flow in the Middle East. Africa though is lost. It's such a mess and I'm glad it represents such a small part of this fund. History will, hopefully, prove me wrong but I don't see any of central Africa contributing to the success of my retirement account, period.