Frontier Markets Don't Perform Like Emerging Markets - dummies

Frontier Markets Don’t Perform Like Emerging Markets

By Gavin Graham, Al Emid

Frontier markets are considered as a subset of emerging markets. Frontier markets are principally those with lower income per head and are at an earlier stage of economic development than emerging markets. Moreover, they don’t move in line with emerging stock markets. That difference provides you with a major benefit of adding a small amount of frontier markets to your portfolio, even if you already own an emerging market fund.

In the five years between the end of the Great Financial Crisis ignited by the bankruptcy of Lehman Bros. and February 2014, emerging markets performed more profitably than frontier markets, with the MSCI Emerging Markets Index up 11.3% per annum and the MSCI Frontier Markets Index up a lower 9.7% per annum.

More importantly, in the three years ending February 2014, the MSCI Emerging Markets Index was down –4.7% per annum while the MSCI Frontier Markets Index was actually up 0.7% per annum. In the last year, frontier markets have decisively outperformed emerging markets, up 14.9% against a decline of –11.2%.

That difference, called non-correlation, happens when one asset class moves in the opposite direction to another class. Therefore owning both classes reduces the overall volatility of an investor’s portfolio. This is why most portfolios own both bonds for fixed income and stocks for appreciation. These two asset classes behave in different ways and usually do not have a high correlation with each other.