Daisy Maxey is a talented financial columnist for WSJ.com. Ms. Maxey also follows me on Twitter. Not surprisingly, then, I may be slightly hesitant to question the timing of her recent feature, “Frontier Market Funds Offer Promise, Risk.”
By the percentages, Ms Maxey cites data that is supposed to represent opportunity in the least developed countries and regions. Yet the risk-adjusted returns over a 10-year rolling period are lower for frontier markets than for other investment areas. Even if one ignores measures of risk like beta and standard deviation, the returns themselves are less palatable than those of the emerging markets, developed international markets and the United States.
|Will the Next 10 years Be Better For The Frontier?|
|10-YR Annualized Historical|
|MSCI Emerging Markets||13.4%|
|MSCI Germany Index||8.7%|
|MSCI All-World Ex US||7.5%|
|MSCI EAFE Index||6.2%|
|MSCI Japan Index||6.1%|
|MSCI USA Index||5.8%|
|MSCI Frontier Markets||5.1%|
Naturally, I am curious why Ms. Maxey decided to focus on the worst 10-year annualized performer. One possibility may be the analysts in the article itself. Many seem to feel that the next 10 years will reward countries with the greatest potential for growth — countries with greater gross domestic product possibilities than that of traditional emergers like China and Brazil. Conversely, the near-term performance of a relative newcomer, iShares MSCI Frontier 100 Index Fund (FM), may have been the impetus behind discussing investments from unpaved roads less traveled.
On the other hand, it is hard to dismiss the reality that frontier market performance is all over the proverbial map. Guggenheim’s long-standing Frontier Market ETF (FRN) has journeyed in the opposite direction, leaving its investors to ponder their frustrating allegiance to riskier regional assets.
Menawhile, PowerShares Middle East North Africa Frontier (PMNA) has also been a disappointing underperformer.
So where does that leave the discussion? Wander as deep into the investment jungle as one can possibly go? Or stick with emerging markets where the risks may not be quite as great (or as exotic) as Vietnam or Peru?
At this moment, the best risk-adjusted rewards are likely to come from less volatile non-cyclicals in the emerging markets. I like iShares MSCI Emerging Market Minimum Volatility (EEMV). There is less guesswork with respect to the breakout country ETF from the frontier or the emerging realm; moreover, there is less reliance on energy and materials to carry the day.
The net expense for the time being is a paltry 0.25%, the 30-day SEC yield is 2.75%, and the beta is 0.87 with the S&P 500. While EEMV started slow out of the 2013 gate, it has broken solidly above a 50-day moving average.
At the p