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So-called “frontier markets” stand out amid wobbly developed markets

Inquirer.com Wednesday, February 12, 2014, 1:08 AM

The sell-off in the United States and emerging stock markets has highlighted some shining “frontier” markets, which have performed well in the meantime.What is a “frontier” market? It’s even less liquid, with fewer laws and less-developed capital markets, than an emerging market. For frontier, think Vietnam, Iraq, Myanmar, or Ivory Coast.

Let’s compare performance. The iShares MSCI Frontier 100 fund (symbol: FM) holds companies such as Qatari banks and a Nigerian brewery. That frontier market index has performed very well over the last three months, up roughly 6 percent, compared with iShares MSCI Emerging Markets (EEM), down 5 percent over the same period.

Other emerging markets’ funds have sold off similarly, such as Vanguard FTSE Emerging Markets (VWO), Schwab Emerging Markets Equity ETF (SCHE), and the closed-end funds Aberdeen Emerging Markets Smaller Company Opportunities Fund (ETF) and Morgan Stanley Emerging Markets Fund (MSF).

Why the interest? Because every other market feels wobbly. Make no mistake, “frontier” markets are highly risky, and are probably not suitable for retail investors.

Yet there is immense interest in them. Just last month, Larry Speidell, founder and chief investment officer of Frontier Market Asset Management, an independent investment management firm in La Jolla, Calif., gave a presentation here to the CFA Institute of Philadelphia. His fund includes equity investments in frontier markets such as Bangladesh, Botswana, Ghana, Ivory Coast, Kazakhstan, Kenya, and Qatar.

“Put Myanmar on your 2014 watch list of investment-worthy frontier markets,” notes Peter Kohli, CEO and founder of DMS Funds, based in Leesport, Pa. Coca-Cola and Caterpillar already operate in Myanmar, and Ford will be opening a dealership to sell trucks there. Numerous websites have sprung up with information on investing in Myanmar. (Kohli’s favorite is www.investinmyanmar.com).

Still, U.S. regulators are wary. FINRA, the American brokerage watchdog, this year issued a letter sounding warnings about mutual funds that invest in frontier markets, which were among the best-performing assets in 2013.

“Heightened risks associated with investing in foreign or emerging markets generally are magnified in frontier markets,” FINRA said in its letter. For instance, there could be no way to sell if the market is illiquid.

Remember, getting into frontier markets is easy. Finding the exit quickly could be painful to your portfolio.

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