Three reasons why frontier stocks are now a strategic asset class

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Aug. 18 2020, Updated 5:15 a.m. ET

Frontier markets have had a strong showing so far this year. However, many investors may be approaching the frontier too narrowly, viewing it as a subset of the broader emerging market world. Russ explains three reasons why frontier stocks deserve their own strategic allocation.

Frontier markets have been gaining attention from market watchers and investors alike in recent months.

The MSCI Frontier Markets Index has outperformed its developed and emerging market counterparts so far this year, as investors have been searching for growth and bargains in a slow-growing world where most major asset classes appear fully valued.

Market Realist – The MSCI Frontier Market Index as tracked the iShares MSCI Frontier 100 Index Fund (FM). It has given better year-to-date (or YTD) returns than the developed EFA and Emerging Markets Index funds (EEM). The following graph shows the performance comparison of the three indices.

However, despite frontier markets’ increasing popularity, many investors are approaching frontier stocks too narrowly, viewing them as a subset of their emerging markets’ (EMB) allocation and selling off part of their emerging market equities’ exposure to gain access to the frontier.

As my colleague Kurt Reiman and I write in our new Market Perspectives paper, “Investing on the Frontier,” frontier markets should not be lumped in with emerging markets and instead, they should be viewed as a separate asset class, a view I’ve been advocating for a while.

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Market Realist – The investors need to realize that frontier markets are an asset class in their own right. They shouldn’t group them with asset allocation to emerging markets (VWO). Although U.S. equities (SPY) were performing better than emerging and frontier markets until the first quarter of this year, the tide seems to have turned. It would be a good idea for investors to include both emerging and frontier stocks in their portfolios.

Read the next part of series to find out why an investor should look at frontier stocks as part of his portfolio.

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