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Frontier Markets: Overlooked Opportunity?Will Frontier Markets Deliver Stellar Returns like Emerging Markets have?
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April 2010 1
Frontier Markets: Overlooked Opportunity?Emergingmarketequitieshaveexperiencedquitearidesincethe1990s.Whiletheroadhasbeenrocky,
withtheAsiancurrencycrisisbeingjustoneevent,theeventualrewardforlongterminvestorswas
significant.
Today,
emerging
market
equities
have
earned
a
place
in
many
investors
portfolios.
Frontier
marketsmaybeembarkingonasimilarjourney,withthepotentialforlongtermrewardsforthosewho
followthelesstraveledpathofthisriskyassetclass.
Insomeways,frontiermarketsarentasforeignasonemightthink.Forinstance,companieswithglobal
franchises,suchasNestle,Guinness,Unilever,Total,Cadbury,andStandardChartered,allhave
subsidiariesorrelatedcompanieslistedinfrontiermarkets,whicharethemarketsbeyondboththe
developedandemergingworlds.
Anotherpotentiallymajorbenefittofrontiermarketsexposureisdiversification.Eachfrontiermarketis
muchmoreofalocalmarketthanabitplayerontheglobalstage.InSriLanka,a25yearcivilwar
againstaninsurgencygroup,theTamilTigers,cametoanendinMay2009.Thisledtoanimmediate
popin
the
Sri
Lanka
market
and
will
likely
lead
to
apositive
re
rating
of
the
country
over
the
long
term.
Thisbenefitwasnotrealizedbyinvestorsindevelopedandemergingmarkets.Youhadtobeinvestedin
frontiermarketstobenefit.Thatsaid,disasterslikeZimbabwe,whereRobertMugabehastrampled
humanrightsandpursuedeconomicpoliciesthathavecausedmeteoricinflation,arepartofthefrontier
marketslandscapeaswell.Overall,becauseoftheidiosyncraticrisksaffectingeachfrontiermarket,
whenonecalculatesfrontiermarketsaggregatevolatility,theyarelessvolatileasagroupthan
emergingmarketsandaboutequalinvolatilitytodevelopedmarkets.
Certainly,frontiermarketscomewithsignificantrisks.Frequentlytherisksareknownandpricedinto
thesecurities,andtheyarenotnecessarilydifferentthantherisksoneseesinemerginganddeveloped
markets.Infact,manyinvestorshaveenjoyedthebenefitsofexposuretoemergingmarketsinrecent
yearsbut
view
frontier
markets
as
too
risky,
too
out
there.
Avoiding
frontier
markets
doesnt
guaranteeavoidingcountryspecificorsystemicrisksinthedevelopingworld.Venezuelawaspartofthe
MSCIEmergingMarketsIndexwhenPresidentHugoChavezdecidedtonationalizeitsmainoilcompany.
Itisnowafrontiermarket.WhenRussiashutdownitsstockexchangeseveraltimesinthefallof2008,it
waspartoftheMSCIEmergingMarketsIndex.Russiaremainsanemergingmarkettoday.
Inthedevelopedworld,risksarefrequentlynotproperlypricedintomarketsbecauseoftheperception
ofstability.TheriskofacollapseintheU.S.bankingsystemcertainlywasntpricedintothemarketsin
2007,thoughitwasagenuinerisk.Moreover,afewfrontiermarketshavefiscalfortunesthatareakin
todevelopedmarketsorbetter.Forexample,asofDecember2009,itwaslessexpensivetoinsure
againstadefaultonSloveniangovernmentbonds(ratedAAbyS&P)thantoinsureagainstadefaulton
thetopratedU.K.governmentdebtbasedoncreditdefaultswapprices.ClearlySloveniaoffersabetter
creditriskthandiceydevelopedmarketslikeGreece.
Frontiermarketsofferthepotentialforstronglongtermreturnsanddiversificationbenefitsata
reasonablelevelofvolatility.Therearecaveatstothoseassertionsandmuchtothinkaboutbefore
investing.Thispaperservesasanintroductiontofrontiermarkets,discussingboththeadvantagesand
risksassociatedwiththisassetclass.
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April 2010 2
What are Frontier Markets?Thereisnoprecisedefinitionoffrontiermarkets.Generally,theyareconsideredtobelowliquidity
marketsoutsideofdevelopedmarkets(definedastheMSCIEAFEIndexconstituentsandCanada)and
emerging
markets
(defined
as
the
MSCI
Emerging
Markets
Index
constituents).
These
outsiders
encompass7080stockmarketsthattotalapproximately$233billioninmarketcap1,whichrepresent
1%ofthetotalworldmarketcapitalization.2 Thelistofcountriesprovidedbelowisconsideredtobethe
broadfrontieruniverse.
1MarketcapofS&PFrontierBMIIndex12/31/2009
2ComparingS&PFrontierBMIIndextoMSCIAllCountryWorldIndex12/31/2009
Albania Cameroon Guyana Malawi Panama* Swaziland
Armenia CapeVerde Iran Maldives PapuaNewGuinea Tanzania
Azerbaijan CaymanIslands Iraq Malta Paraguay Togo
Bahrain* Colombia* Jamaica Mauritius Qatar* Trinidad&Tobago
Bangladesh* CostaRica Jordan* Moldova RepublikaSrpska Tunisia
Barbados Coted'Ivoire* Kazakhstan* Mongolia Romania* U.A.E.*
Belarus Croatia* Kenya* Montenegro SaudiArabia Uganda
Benin Cyprus* Kuwait* Namibia Senegal Ukraine*
Bermuda Ecuador KyrgyzRepublic Nepal Serbia Uruguay
Bolivia ElSalvador* Latvia Niger SlovakRepublic Uzbekistan
Bosnia Estonia* Lebanon* Nigeria* Slovenia* Venezuela
Botswana Fiji Libya Oman* SriLanka* Vietnam*
Bulgaria* Georgia* Lithuania* Pakistan* St.Kitts&Nevis Zambia
Cambodia* Ghana Macedonia Palestine Sudan Zimbabwe
*MemberofS&P/IFCGExtendedFrontier150Index Bolded MemberofMSCIFrontierMarketsIndex
Source:CaravanCapitalManagement,LLC
FrontierMarketsUniverse
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April 2010 3
PerformanceTheperformanceoffrontiermarketsneedstobesufficientlyenticinginordertomaketheinherentrisks
acceptabletoinvestors.Whiledataisonlyavailablebackto1995,thegraphbelowrevealsthatfrontier
markets
have
fared
better
than
the
developed
world
and
emerging
markets
over
most
time
periods.
Untiltheendof2007,frontiermarketsreturnswereupinthestratosphere.Thecrashof2008,
however,broughtthembackdowntoearthandclosertootherassetclasses.Forinvestorslookingto
establishnewpositionsinfrontiermarkets,thiscrashisapositivedevelopment.Thefourfrontier
marketsstrategiesintheeVestmentAlliancedatabasewere,onaverage,inthebottom99thpercentile
ofemergingmarketsmanagersfortheoneyearperiodendingSeptember30,2009.
AsofDecember31,2009 S&P500 MSCIEAFE MSCIEM MSCIFM S&PFM1Year 23.45% 27.75% 74.49% 6.74% 9.11%
3Year(annualized) 7.70% 8.66% 2.73% 12.96% 12.15%
5Year(annualized) 1.65% 0.85% 12.79% 0.19% 1.08%
10Year(annualized) 2.72% 1.07% 7.29% N/A 10.16%
Since
12/1995
(annualized)
4.30%
2.38%
5.62%
N/A
4.74%
Source:Bloomberg,MSCIandS&P.
0
50
100
150
200
250
300350
400
450
Dec95
Jun96
Dec96
Jun97
Dec97
Jun98
Dec98
Jun99
Dec99
Jun00
Dec00
Jun01
Dec01
Jun02
Dec02
Jun03
Dec03
Jun04
Dec04
Jun05
Dec05
Jun06
Dec06
Jun07
Dec07
Jun08
Dec08
Jun09
Dec09
Adjuste
dIndex
Leve
l
HistoricalPerformance
S&P500 MSCI
EAFE
MSCI
EM MSCI
Frontier S&P
Frontier
Composite*
*TheS&PFrontierComposite IndexwasreplacedbytheS&PFrontierBMIIndexon11/1/08.
Source: Bloomberg,MSCIandS&P.
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April 2010 4
Historical ValuationsFrontiermarketshavehistoricallybeenlessexpensivethandevelopednonUSmarketsbasedonprice
toearningsandpricetobookratios,butmorerecentlythetrendhasbeentowardsconvergenceon
valuation.
Since
2000,
frontier
and
emerging
markets
have
had
similar
valuations,
with
the
largest
divergenceoccurringin2009,asemergingmarketsralliedmuchmorestronglythanfrontiermarkets.
Itisalsoworthnotingthatthemoreeasilyinvestablefrontiermarketshaveroutinelyhadmuchhigher
valuationsthanthemoreexoticfrontiermarkets.
Dec09 FrontierP/E well
belowothermarkets
0
10
20
30
40
50P/EComparison Monthly(1/1/00 12/31/09)
S&P500 MSCIEAFE MSCIEM S&PFrontier
Source:Bloomberg,MSCIandS&P.
P/E(Tra
iling
12mo
.)
Whilemostequityclassesreboundedheavilyin2009,frontiermarketsremainedlargelyoverlooked.At
theendof2009,emergingmarketswereonly26%offoftheir2007peak.Insharpcontrast,frontier
markets
were
still
down
53.7%.
This
could
be
a
sign
of
opportunity
for
investors.
28.0%
26.2%
33.8%33.9%
26.0%
53.7%
70%
60%
50%
40%
30%
20%
10%
0%
AmountIndexLevelsStillDown
from'07'08Peaks
Dataasof12/31/09
Source:Bloomberg
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April 2010 5
Potential Diversification BenefitsOneattractivepointaboutfrontiermarketsistheirlowcorrelationrelativetootherequityassetgroups.
Thechartbelowcomparesthecorrelationsoffrontiermarkets,emergingmarkets,anddevelopednonUS
markets
against
the
US
Market
(Russell
3000
Index).
The
data
shows
that
frontier
markets
have
been
lesscorrelatedtotheUSMarketthanemerginganddevelopednonUSmarkets,particularlyovera 14
yeartimeperiod.
0.0
0.2
0.4
0.6
0.8
1.0
MSCIEAFE MSCIEM Frontier
CorrelationstotheUSMarket
1yr 3yr 5yr 14Yr
*Basedonaverageof:1)S&PFrontierComposite2)MSCIFrontierIndexand3)S&PFrontier
Extended150.
**Basedon averageof:1)S&PFrontierCompositeand 2)MSCIFrontierIndex.
Note:S&PFrontierCompositeIndex was
Source: Bloomberg,MSCIandS&P.
****
replacedbytheS&PFrontierBMIIndexon11/1/08.
Themorerecentone andthreeyearperiodssuggestthatfrontiermarketsarebecomingmore
correlatedtoUSMarkets.Thisistobeexpectedasfrontiermarketsgrowandevolveintomore
developedmarkets.
However,
this
process
should
be
slow
and
is
unlikely
to
occur
in
such
adramatic
shiftasthechartssuggests.Thefinancialmeltdownof2008andresultingbreakdownofglobalfinancial
marketsincreasedshorttermcorrelationsacrossallequityassetclasses.Withnowheretohide,frontier
marketscorrelationsshifteddramaticallywiththerestofthefinancialmarket.Interestingly,if2008was
excludedfromthecorrelationcalculationsandtheenddatewasDecember31,2007,frontiermarkets
correlationstotheUSforaoneyearandfiveyeartrailingperiodwouldbe0.27and0.11,respectively,
vs.0.66and0.69foremergingmarketsand0.71and0.81forEAFE.Whenmarketsreturntoamore
normalstate,wewouldexpectfrontiermarketstolargelyresumetheirhistoricallylowcorrelations.
0
0.1
0.20.3
0.4
0.50.6
0.7
0.8
July1998 June
2003
July2003 June
2008
January2005
December2009
CrossCorrelationBecausefrontiermarketsaresmallandrelativelyisolatedfromoneanother,
especiallycompared
to
their
more
globalized
counterpartsintheemergingmarketsspace,
theyexhibitlowcrosscorrelationsfrom
countrytocountry.Thislowcrosscorrelation
canbeutilizedasanimportanttoolfor
diversificationandreducingoverallportfolio
volatility.Vietnamsinflationissuedoesnt
affectSriLanka,andSriLankassuccessover
theTamilTigersmilitarygroupdidntaffect
Vietnam.
Frontiers Emerging BRIC's
Source:Caravan CapitalManagement,LLC
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April 2010 6
VolatilitySomeinvestorsmayviewfrontiermarketsasamorevolatileversionofemergingmarkets.Onacountry
andstockspecificbasis,thismaybetrue,butawelldiversifiedfrontiermarketsportfoliomaysurprise
some
with
its
comparatively
low
volatility.
Frontier
markets
in
aggregate
have
historically
been
less
volatilethanemergingmarketsandcomparabletoEAFE.Thegraphbelowillustratesthistrend.
Note:ThespikeinvolatilityforFrontiermarketsinFebruaryof2007isduetoaddingMSCIFrontierMarketstothecalculation.Beforethatdate,onlyS&PFrontierCompositedatawasused.Afterthatdate,theS&PFrontierCompositewasaveragedwithMSCIFrontierMarkets.MSCIFrontierMarketshashighervolatilitybecauseitcoversfewercountriesandfewerstocks.TheMSCIindexalsohashigherexposuretothemorevolatileGCC(GulfCooperationCouncil,whichrepresentssixMiddleEasterncountries).
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
AnnualizedStandardDeviation
3YearRollingStandardDeviation
S&P500 MSCIEAFE MSCIEM S&P&MSCIFrontier*
Source:Bloomberg,MSCIand S&P.
Typically,themostvolatilefrontierregionsare
EasternEuropeandtheMiddleEast.Theless
developedandlessliquidafrontiermarket,the
lessvolatileitsreturnstendtobe.Thisistruein
partbecausemarketsthattradelessfrequently
haveless
price
movement
captured
by
volatility
statistics;itdoesnotmeanthattheyarenecessarilylessrisky.
Mostfrontiercountrieshavelowervolatilitythan
theaverageemergingmarketscountry.Inthe
aggregate,frontiermarketsalsohavealower
volatilitythanemergingmarkets.Thegraphtothe
rightcomparestheS&PFrontierCompositetothe
S&PIFCIIndex,whichisanemergingmarkets
index.
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
AverageCountryVolatility IndexVolatility
VolatilityComparison
S&PFrontierComposite*
S&P/IFCICountries
*S&PFrontier Compositeincludes S&PFrontierBMIexGCC
dataafter10/2008
Basedon10yearmonthly returnsasof12/2009
Source:CaravanCapitalManagement,LLC
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April 2010 7
RisksThoughfrontiermarketshavemanypositiveattributes,theyarerisky.Frontiermarketsnotonlyhave
theusualrisksassociatedwithinternationalinvesting,theyhaverisksthatareparticulartothemor
more
severe,
such
as
liquidity
risk,
country
risk,
and
local
market
dynamics.
Liquidity RiskFrontiermarketslowliquiditylevelscanmakeenteringandexitingpositionschallenging.Lowtrading
volumerequireslargeinvestorstobeslowonthewayinandslowonthewayout.Thisrequirestiminga
purchasecorrectly,ormoreimportantly,notliquidatingapositiontooquicklytoavoidlosingsignificant
valueonthewayout.
Thetypicalbid/askspreadforfrontiermarketsissignificantlylargerthanthedevelopedworld.The12
monthrollingmedianspreadtippedover3%in2005.Thisspreadhasalargeimpactonthelevelof
tradingforfrontiermarketassetmanagers.Highturnoverstrategiesdonotfarewellinanenvironment
whereseveralpercentagepointsarelostthroughmatchingupabuyerandaseller.
Theuniverseofstocksforthebid/askanalysiswasfoundthroughascreeninBloomberg.Theuniverserepresentsallstockswithamarketcapover$50millioninthecountrieslistedonpage2.Note:Bermuda,Panama,andtheCaymanIslandswereexcludedbecausetheycontainedalargeamountofcompaniesthatdidnothavesignificantbusinessoperationsinthosecountries.A
lack
of
liquidity
is
one
reason
that
active
managersdifferconsiderablyintheir
approachestofrontiermarkets.Theactive
managersthatfocusonmoreliquidareasofthefrontiermarketscanrunmuchlargerassetpools,but
themanagerswhofocusonthelessliquidareasofthefrontiermarketshaveaccesstowhatislikelyto
bethebetterlongterminvestment.Thesuperioropportunitysetcomesatthecostofhigher
transactioncosts,lowerliquidityand,often,highermanagementfees.
Country RiskInmostdevelopedcountriesandthelargeremergingcountries,investorsareusuallyconcernedwiththe
standardcountryriskssuchaseconomic,political,andcurrencyrisk.Movingintothefrontiermarkets,
investorsbegintogivemoreconsiderationtoissueslikethestabilityofacountrysgovernmentorthe
potentialforwar.Goodresultscanmorphintoproblems,too.Rapideconomicgrowthmayleada
governmenttohurriedlyenactpoliciestoprotectlocalcurrenciesorbusinessesfrominflation.Other
typesofriskinclude:corruptioninbusinessandpolitics,publichealthconcerns,andlimitationson
economicandpoliticalfreedom.Inextremecases,theseproblemscanleadtoaninvestmentbeing
wipedoutovernight.Inothersituationstheycouldhavelittletonoeffectonaninvestment.Itis
importanttorecognizetheserisksandtheirpotentialrepercussionstoaportfolio.
0%
1%
2%
3%
4%
Bid/AskSpread
Trailing12Month MedianSource:Bloomberg
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April 2010 8
Local Market DynamicsInexperiencedLocalInvestorsManyfrontiermarketsarestilldominatedbylocalinvestorswhoareinexperiencedcomparedtotheir
developedworldcounterparts.Localinvestorsunsophisticatedapproachtendstohavealarger
presencein
frontier
markets
than
in
developed
or
emerging
markets.
From
an
investor
standpoint,
irrationalmarketparticipantscanleadtoirrationalmarketbehavior,whichleadstoshortterm
headachesbutlongtermopportunities.
TransparencyGoodinformationflowisfrequentlylackinginfrontiermarkets.Languagebarriers,lackoftimely
financialreporting,andalackofinsightfulresearchareaddedchallengestoanalysis.Althoughallof
thesecharacteristicsaddariskpremiumfortheunknown,thisopacitycanalsobeasourceofalphafor
anactivemanagerwhoknowswheretolookandwhattolookforinthefrontiermarketsspace.
TransactionConcernsWhen
purchasing
local
shares
in
many
frontier
countries,
there
can
be
additional
hoops
to
jump
through
tocompletethetransaction.Somefrequentissuesthatariseforforeigninvestorsaretaxes,restrictions
toforeigninvestment,dealingwithforeignexchanges,andfindingatrustworthybroker.Manyfrontier
marketsstrategiesuseAuerbachGrayson,abrokerageinNewYorkCity,tonavigatethelocalbroker
sceneofmanyfrontiermarkets.CTChasmetseveraltimeswithJonathanAuerbach,coFounderand
ManagingDirectorofthefirm,tounderstandtheirroleintheprocess.
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April 2010 9
What is the best way to invest in Frontier Markets?Active ManagementTherearecasesforbothactiveandpassivemanagementinmostequityassetclasses,butfrontier
markets
make
a
particularly
strong
case
for
active.
Passive
frontier
markets
options
are
limited
and
generallyregionspecific,whileactivemanagershavetheopportunitytosearchthebroadfrontier
marketsforreturns.(Pleasenotethatwhenwediscusspreferringactiveexposuretopassiveexposurein
frontiermarkets,thepassivestrategieswetakeissuewitharegenerallyexchangetradedfundsi.e.ETFs.
WestillsupportexposuretotheParametricEatonVanceEmergingMarketsstrategy,astructured
emergingmarketsstrategythatinvestsinbothemergingmarketsandfrontiermarkets.)
Inaddition,skilledactivemanagershaveagreatopportunitytoexploittheinefficienciesembeddedin
frontiermarkets.Localinvestorsmaynothavetheexpertisetoevaluateacompanyscurrentfinancial
situationandfuturegrowthprospects,andoutsideinvestorsfaceobstaclesbecausesellsidecoverageis
quitelimited.Aseasonedmanagercanunlockalphaandcontrolrisksthroughthoughtfulduediligence
atbothacountrylevelandastocklevel.
Adownsideofactivemanagementisthatitaddsanotherlayerofriskinanalreadyriskyarena.Frontier
activemanagementalsotendstobemoreexpensivethanotherassetclasses.Thiscancomefrom
highertransactioncostsandoperatingcosts,aswellasapremiumforaskilledmanager.
Passive ManagementThroughoutthepastdecade,anumberofexchangetradedfunds(ETFs)havebeenlaunchedthatmostly
coverportionsofthefrontiermarkets,butnonereplicatethebroadindices.Forinstance,therearea
fewMiddleEastETFs,butnonethattracktheMSCIFrontierIndexortheS&PFrontierBMIIndex(see
page11foralistofavailableETFs).
Toget
broad
exposure
to
the
frontier,
it
is
our
view
that
these
passive
investments
are
insufficient.
The
DeutscheBankETFgivesthebestbroadfrontiermarketexposure,butitstillonlycontains40stocksand
thereislimitedaccesstothefund.NoneoftheotherETFscanstandaloneasgoodexposuretothe
frontier.
WhyisntthereaUSbasedETFthattracksoneofthebroadbasedindicesdiscussedatthebeginningof
thispaper?Therearelikelyanumberofreasonswhythishasntcometofruition.AnETFproviderfaces
severalchallengesincludingtrackingerror,liquidity,andtransactioncosts.Alargenumberofstocksin
frontierindiceswouldrunintoliquidityconstraints,whichcouldprovetobecostlyandcreate
substantialtrackingerror.Itisdifficulttospeculatewhensuchproductswillbelaunchedbecauseofthe
variouschallenges.
Atthispoint,passivestrategiesdonotmakesenseunlessinvestorsareaimingforaspecificand
concentratedfocusonasubsegmentofthefrontieruniverse.
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April 2010 10
ConclusionFrontiermarketsappeartobeaveryattractivesegmentinwhichtoallocateriskcapital.Thisisbasedon
theattractivevaluationsrelativetotheirlongtermpotential,diversificationbenefitsduetolowcross
country
correlations,
strong
economic
growth,
and
the
potential
for
active
management
to
add
value.
Whenaninvestorallocatestofrontiermarkets,itisimportanttodiversifyacrosscountriesandregions
tominimizeidiosyncraticrisk.
AtCTC,werecommendcomplementingtheemergingmarketsequityportionofaportfoliowithfrontier
marketsexposure.Inmosteconomicenvironments,exposuretofrontiermarketsshouldnotexceed
25%oftheemergingmarketsportionofaportfolioandshouldbeinlinewithspecifiedrisktolerances.
Wealsorecommendsteeringclearofpassiveproductsinthefrontiermarketsspace,asthecurrent
offeringsdonotgivesufficientbroadbasedexposuretotheassetclass.
ByCTCTraditionalResearchTeam
Source:CTC
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April 2010 11
ThefollowingETFsarecurrentlyavailable:
Name Ticker Comments
Claymore/BNY
MellonFrontier
MarketsETF
FRN ThisfundisthebroadestfrontierETFavailable.Thatbeingsaid,it
hasserious
limitations.
It
invests
almost
entirely
in
ADRs.
Most
frontierstocksareonlyavailablethroughlocalshares,which
drasticallylimittheETFsopportunityset.Inaddition,alarge
percentageoftheholdings(59%asof12/31/09)areconcentrated
inonlythreecountries:Chile,Poland,andEgypt.Manywould
arguethatthesethreecountrieshaveclosercharacteristicsto
emergingcountriesthanfrontier.Otherfrontiercountriessuchas
Kuwait,Vietnam,Nigeria,andKazakhstanhavelittleorno
representationintheETF.OnepositivepointistheETFslow
expenseratio,whichisexpectednottoexceed65bps.Investors
needtoconsiderthepreferencetowardADRsandthelarge
countryfocus
areas
before
adding
FRN
to
their
portfolio.
3
PowerShares
MENAFrontier
CountriesETF
PMNA PMNAreplicatestheNASDAQOMXMiddleEastNorthAfricaIndex
throughtheuseofADRsandGDRs.TheMENAIndexincludes
Kuwait,Bahrain,Qatar,UAE,Oman,Lebanon,Egypt,Jordan,and
Morocco.Theindexrebalancesbasedona20%maximumcountry
allocationand10%maximumsinglestockallocation.Typicalof
mostfrontiermarketindices,financialsarethelargestsectorof
PMNAatapproximately5060%.Theexpenseratioismodestat
0.95%.
MarketVectors
AfricaETF
AFK AFKtrackstheDowJonesAfricanTitans50Indexandiscomprised
of50Africanstocks.SouthAfricaandNigeriamakeupover50%
andbanksrepresent38%ofthefund.Over90%ofconstituentsare
below$6billioninmarketcap.Theexpenseratioisadetractor,as
itiscomparabletoactivemanagementat120bps.4
MarketVectors
GulfStatesETF
MES MEStrackstheDowJonesGCCTitans40Indexandiscomprisedof
40stocksinKuwait,Oman,UAE,Qatar,andBahrain.Kuwaitmakes
up60%andbanksrepresent45%ofthefund.Over85%of
constituentsarebelow$6billioninmarketcap.Theexpenseratio
isalsocomparabletoactivemanagementat138bps.5
WisdomTree
MiddleEast
DividendFund
ETF
GULF ThisETFtrackstheWisdomTreeMiddleEastDividendIndex,which
isadividendweightedindexfocusedonMiddleEastcompanies
thatpayregularcashdividends.Ithas65stocksfromKuwait,
Egypt,Qatar,Morocco,UnitedArabEmirates,Jordan,Bahrain,and
Oman.5
SPDRS&P
Emerging
MiddleEast
andAfricaETF
GAF GAFfollowstheS&PMiddleEastandAfricaBMIIndex.Although
theindexnamemayleadsometobelievethisisafrontierindex,it
isessentiallyaSouthAfricanandIsraeliindex.SouthAfricaand
Israeltogetherrepresentapproximately8090%oftheholdings,
3Claymore.com
4Vaneck.com
5Wisdomtree.com
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April 2010 12
whichmaketheindexappearmoreemergingmarketsthan
frontiermarkets. Theexpenseratioismodestat59bps.6
dbxtracker
S&PSelect
Frontier
LU0328476410 ThisDeutscheBankdbxtrackerfollowstheS&PSelectFrontier
Index,whichcontainsthe40mostliquidstocksintheS&Pfrontier
universe.It
is
available
through
aSICAV
and
is
only
traded
on
the
LondonStockExchange,XTERA,SIXSwissExchange,andBorsa
Italia.ItisnotavailableforUSinvestors.
6Spdrs.com
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April 2010 13
Notes on Frontier Markets IndicesIndicesmaydifferintheirdefinitionsoffrontiermarkets.Indexprovidershavetheirowninterpretations
andscreensforfrontiercountriesandcompanies.Asanexample,oneindexprovidermaydeema
countrys
trading
volume
as
adequate,
while
another
may
exclude
it
as
too
low.
Note
that
active
managersalsohavetheirowninterpretationsoffrontiermarkets,whichmayleadthemtoseek
opportunitiesoutsideoftheindices.Thiscanmakefrontierinvestmentschallengingtobenchmark,
emphasizingtheimportanceofevaluatingindexmethodologies.Thefollowingisalistofwellknown
frontiermarketsindices:
MSCIFrontierMarketsIndex
Thisindexincludesroughly180stocksfrom22countriesthatMSCIconsiderstobeliquidandforeign
investorfriendly.Thisindexwillincludemostofthelargercompaniesinthefrontiermarketsuniverse.
Asofyearend2008,Kuwaitwas36%andfinancialcompaniesrepresented62%oftheindex.Theindex
startedinMayof2002.7
S&PFrontier/IFC
Composite
ThiswastheoriginalfrontiermarketsindexcreatedbytheInternationalFinanceCorporation(IFC),
whichwaslaterpurchasedbyStandardandPoors.Theindexcontained24countries.Thisindexwas
discontinuedon10/31/2008byS&Ptoencourageadoptionoftheircurrentproductlineup,theS&P
FrontierBMIIndex.Allofthereturndatabefore2002usedforanalysisinthispaperisfromthisindex.It
isalsotheonlyreturndataavailablefor19952002.
S&PFrontierBroadMarketIndex(BMI)
TheS&PFrontierBroadMarketIndexincludes616companiesin34countries.Asofyearend2008,
Kuwaitwas27%andfinancialcompaniesrepresented63%oftheindex.TheFrontierBMIencompasses
morecountriesandcompaniesthantheotherindices,givingFrontierBMIthelargestopportunityset.
Althoughthis
index
is
more
comprehensive,
the
downside
is
that
it
will
include
stocks
and
countries
that
somedonotconsiderinvestable.TheindexstartedinNovemberof2008.8
S&P/IFCGExtendedFrontier150Index
Theindexiscomprisedof150stocksfrom27countries.Thisindexisuniquebecauseitputsa15%cap
ontheweightofanycountry.ThisputsKuwaitata15%cap,whichisabouthalfoftheotherindices
weight.ThisindexstartedinJanuaryof2005.
S&PSelectFrontier
AsubsetoftheExtendedFrontier150Index,thisindexcontainsthelargestandmostliquid40stocksin
theS&P/IFGCExtendedFrontier150index.Althoughitisasubsetofthe150,itisnotconstructedwitha
15%countrycap.Asofyearend2008,Kuwaitwas30%oftheindex.ThisindexstartedinJanuaryof
2005.
InvestmentFrontiersResearch(IFR)ExoticFrontiersIndex
TheExoticFrontiersIndexiscomprisedofstocksinearlystagefrontiercountries.Spanning16countries,
theindexis43%financialsandhasnocountryweightover13%.Generallyspeaking,theindexcontains
lessliquidstocksthatarerarelycoveredbyanalysts.Assuch,correlationsbetweentheindexandother
7Datafrommscibarra.com
8Datafromstandardandpoors.com
8/8/2019 Frontier Markets White Paper April2010
15/15
April 2010 14
assetclasseshavebeenlow.TheExoticFrontiersIndexislesscommonlyusedcomparedwiththe
previouslydescribedindices.
ItisnoteworthythatSaudiArabiaisnotpartofanyoftheaforementionedindices.SaudiArabiahas
manysimilar
characteristics
to
frontier
countries,
but
currently
has
limitations
on
foreign
investment.
Thereareseveralotherindicesthatcoverspecificcountriesorgeographicareaswithinthefrontier
framework.Forinstance,theMSCIGCC(GulfCooperationCouncil)Indexincludessixcountriesinthe
MiddleEast,andtheS&PAfricaFrontierfocusesonthecontinentofAfrica.
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