Leave the Frontier to the USS Enterprise - Show 138

Tuesday, October 21, 2014 6,484 views

The frontier markets consist of developing countries that have not yet made it to or have dropped out of the category of emerging markets. Some examples would be Argentina, Lebanon, Nigeria, Slovenia, and Vietnam. If these names conjure up images of hyperinflation, debt default, currency devaluation, government seizure of private property, civil war, corruption, and overall political instability, then you will understand why frontier markets are considered a very high risk corner of the market. The Financial Industry Regulatory Authority, also known as FINRA, recently issued an investor alert on frontier funds titled “Frontier Funds—Travel with Care”.

The advice given by FINRA is fairly obvious. Know which frontier markets your fund is investing in, stay on top of costs,. As of now, we are aware of only one exchange-traded fund that tracks one of these indexes: the iShares MSCI Frontier 100. The index has six calendar years of data, but the ETF itself has only one from 2013. In looking at the 2013 returns data, an important fact emerges; although the return gained by the fund managers lagged the index by only 0.3%, the return realized by investors lagged it by 2.2% because of the discrepancy between the price and the net asset value of the ETF. This is pretty common with ETFs that are based on highly illiquid securities, and frontier markets are the most illiquid of all financial markets.

Since frontier markets make up less than 1% of the global market capitalization, they are unlikely to move the needle in investor’s portfolios unless they massively overweight them, which would mean taking on a somewhat ridiculous amount of risk. IFA’s advisors are here to weigh these risks and guide our investors towards prudent investing practices that are in their best interest; so when our investors create their portfolios, they can stay the course.


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