It is important to note that not all investors rigidly follow definitions set by index providers such as MSCI. But these do serve as a useful rough guide.
Geographical considerations may prove important for clients who want a stake in the success of particular regions.
Countries from Eastern Europe and Africa are prominent in MSCI’s Frontier Markets grouping. This includes the likes of Croatia, Kazakhstan, Serbia, Kenya, Morocco and Tunisia. This cohort also includes some names from Asia and the Middle East, including Vietnam and Kuwait.
The Emerging Markets list, by contrast, has a handful of members from the Americas, including Brazil and Mexico, and many more Asian countries. Among these is China, as well as Pakistan and Taiwan.
On the investment front, specialists have been quick to point out the limitations of the frontier markets grouping, including greater difficulty buying or selling holdings.
“Liquidity can be very poor in frontier markets so the tradability of securities is an important consideration,” explains Gill Hutchison, research director for fund ratings provider The Adviser Centre.
“The costs of accessing these markets is higher than they are for developed markets: trading, administration and custody costs are more onerous in less developed and more illiquid markets.”
Too high risk?
For some, these drawbacks are too great to overcome.
Rory McPherson, head of investment strategy at discretionary fund manager Psigma, explains: “They are pretty illiquid so it doesn’t really fit our ethos."
Scott Gallacher, an adviser, adds that such exposure would only suit certain clients.
“I’d suggest that this area is only appropriate for those with a higher risk approach to investment or as a very small part of a well-diversified portfolio,” he says.
But frontier markets could boost returns and add diversification to a portfolio, as they are not highly correlated to emerging or developed markets.
david.baxter@ft.com
