Investing in Frontier Markets – Are there good frontier markets managers out there?

bfinance has conducted a number of searches this year in frontier markets and the trend looks set to continue with a healthy pipeline of activity both for global frontier exposure as well as some region-specific interest.

Clients are viewing these as the next emerging markets space and feel they are potentially able to extract a higher return while also gaining greater diversification within their equity portfolio given the lower correlation of this equity asset class with both developed and major emerging markets.

In terms of timing, the asset class has been outperforming this year following a much slower recovery post the declines experienced in 2008. This is somewhat surprising given the risk aversion we have seen to some emerging markets. It highlights the strength and opportunity that some of these markets offer.

There is a common misperception about the depth of the manager universe.  While it is true that on paper there aren’t many managers with five-year plus track records, the universe of managers is expanding.  For clients who can be flexible about constraints (such as minimum assets and track record) it is now possible to negotiate competitive fees in what is a capacity-constrained space.

The general belief is that frontier markets are the least efficient equity universe and therefore managers should be able to outperform in this space.  This is certainly what we see.  While the index has its flaws, it is highly concentrated in the MENA region for example, managers have consistently been able to outperform.