Source: CNBC
Frontier markets tumbled this year, but don't point the finger at the usual suspects, such as weak currencies or oil, investors said. Instead, blame the benchmark index.
Although frontier markets have long been billed as plays on domestic economic growth that is uncorrelated to global markets, they've tracked sharp declines in emerging markets amid huge fund outflows this year. The benchmark MSCI Frontier Market index is down about 18.2 percent year-to-date, in line with the MSCI Emerging Market index's 16.4 percent drop over the same period.
Frontier markets - those not yet big enough to qualify as emerging - are meant to offer the same opportunity for growth that emerging markets such as China, India and Brazil presented 20 years ago. Economic growth there can be rapid. For example, Vietnam reported last week that its economy grew 6.68 percent in 2015.
But frontier countries often have a lot of political risk; can often be vulnerable to commodity prices, cultural and environmental issues; and typically have very thin capital markets.
Frontier markets tumbled this year, but don't point the finger at the usual suspects, such as weak currencies or oil, investors said. Instead, blame the benchmark index.
Although frontier markets have long been billed as plays on domestic economic growth that is uncorrelated to global markets, they've tracked sharp declines in emerging markets amid huge fund outflows this year. The benchmark MSCI Frontier Market index is down about 18.2 percent year-to-date, in line with the MSCI Emerging Market index's 16.4 percent drop over the same period.
Frontier markets - those not yet big enough to qualify as emerging - are meant to offer the same opportunity for growth that emerging markets such as China, India and Brazil presented 20 years ago. Economic growth there can be rapid. For example, Vietnam reported last week that its economy grew 6.68 percent in 2015.
But frontier countries often have a lot of political risk; can often be vulnerable to commodity prices, cultural and environmental issues; and typically have very thin capital markets.
There are 24 countries included in the MSCI Frontier
Markets index, ranging from Argentina (a former emerging market) and
Nigeria to Kuwait and Kazakhstan. And it's precisely the makeup of the
index that's causing it to perform so badly, analysts said. MSCI didn't
immediately return emailed requests for comment.
"Index providers take the biggest, most liquid stocks, mostly financials," said Thomas Hugger, CEO of Asia Frontier Capital, which manages the $15 million AFC Asia Frontier Fund.
In frontier markets, "the big story is the consumer. Consumer stocks are normally small," he said, noting that not only are they not well featured in the index, another particularly important frontier segment - infrastructure - is also absent.
The MSCI Frontier Market index is nearly 54 percent weighted toward financials, with almost 10 percent in the hard-hit energy sector. Consumer discretionary stocks make up less than half a percent.
AFC's fund outperformed the index, but was still down 2.1 percent in the January-November period; Hugger said December's performance was likely to be positive.
That fund isn't the only one looking for stock picks outside the benchmark indexes.
"You have to look at frontier markets as an opportunity set to pick the right countries and the right stocks, rather than saying 'will the frontier markets index be up or down?'," said Dominic Bokor-Ingram, co-manager of the Charlemagne Magna New Frontiers fund, which has about 12 million euros ($13.2 million) under management.
The Charlemagne fund totted up a nearly 4 percent return from the beginning of the year through December 17, according to data from Morningstar, making it among the best-performing of the frontier-market funds domiciled in Europe, Asia and Africa. Morningstar doesn't have a frontier category for U.S.-based funds.
Bokor-Ingram said 80 percent of his fund's picks weren't in the MSCI index.
"Index providers take the biggest, most liquid stocks, mostly financials," said Thomas Hugger, CEO of Asia Frontier Capital, which manages the $15 million AFC Asia Frontier Fund.
In frontier markets, "the big story is the consumer. Consumer stocks are normally small," he said, noting that not only are they not well featured in the index, another particularly important frontier segment - infrastructure - is also absent.
The MSCI Frontier Market index is nearly 54 percent weighted toward financials, with almost 10 percent in the hard-hit energy sector. Consumer discretionary stocks make up less than half a percent.
AFC's fund outperformed the index, but was still down 2.1 percent in the January-November period; Hugger said December's performance was likely to be positive.
That fund isn't the only one looking for stock picks outside the benchmark indexes.
"You have to look at frontier markets as an opportunity set to pick the right countries and the right stocks, rather than saying 'will the frontier markets index be up or down?'," said Dominic Bokor-Ingram, co-manager of the Charlemagne Magna New Frontiers fund, which has about 12 million euros ($13.2 million) under management.
The Charlemagne fund totted up a nearly 4 percent return from the beginning of the year through December 17, according to data from Morningstar, making it among the best-performing of the frontier-market funds domiciled in Europe, Asia and Africa. Morningstar doesn't have a frontier category for U.S.-based funds.
Bokor-Ingram said 80 percent of his fund's picks weren't in the MSCI index.
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