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Investing in Frontier Market Funds

With less volatility in western markets, some investors are looking abroad for opportunities. Investing in frontier market funds may incur some risk, but the potential for profit is quite high. Whether you are in an equity position with your mutual funds or not, the potential risk can be disheartening. However, some simple advice on frontier market could easily allay those fears.

What is a Frontier Market?

Funds that are based on the economy of emerging markets are considered to be in the frontier area. Funds exist for markets in Africa, Asia, the Americas, and the Middle East. Each of these areas has unique issues that cause several kinds of volatility. Yet, they are emerging. While these nations are unstable in some ways, they are producing in sometimes tremendous ways. Their struggle of getting their products to market and selling them are the most difficult hurdle to cross.

What Frontier Markets Are Doing Well?

The opportunities for investing in these markets are hard to underestimate. While some are suffering a down period, others were offering gains of between 9 and 17 percent in 2013. For instance, the MSCI Frontier Markets NR USD, which is a fund with large holdings in North Africa and the Middle East, saw gains of 10 percent in the first quarter of 2013. While there is volatility in these markets, analysts believe that the upward trend will continue for the foreseeable future.

What Markets Are Doing Poorly?

With every upside there is likely to be a downside. For instance, in 2010, the T. Rowe Price African and Middle East Fund saw a loss of over 50 percent and then gained 22 percent in 2011. Many advisors still believe that emerging markets are the place to put mutual funds to work for customers that are less circumspect about risk. When markets went into a major downturn in 2008, frontier markets were still doing well and continue to do so.

How Much of the World Market is Emerging?

Almost 35 percent of the capitalization of the world's stocks is in emerging areas. Frontier markets should not be a major part of your portfolio if you are concerned about the risk. Some emerging market funds devote two to five percent of the mutual to these areas while holding a vast majority of the fund in safer and more secure markets. Mark Mobious of Templeton Emerging Markets in Hong Kong claims that investors should take better advantage of outlying stocks because of potential gains. He suggests funds with a higher emerging market level.

Is Volatility Good?

Volatility is caused by fear and other fluctuations in markets. Whether the cause is political or for some other reason, risk is very often tied to gains. The converse is also true because that is what risk is all about. In the mutual fund arena, your advisors will hedge the risks by building a portfolio that balances risks with secure funds. Most money managers will tell you that a good fund is one that a broad international holdings.

Frontier market funds can be exciting and kind of risky. If your strategy is based on risk, your portfolio will likely reflect an equity position that recognizes overseas opportunity. While your base investments may be safe, your outlying percentages may reflect mutual funds that are based in the far flung markets in African and South America. Whatever your approach, is it important to be aware of opportunity and risk.

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