Much talk at the 2008 Hedge Funds World Global Opportunities Conference, held in New York and hosted by Terrapinn, focused on the challenges and opportunities of investing in the frontier markets. Over the course of the past two days, many of the panelists expounded on the major difficulties associated with investing on the frontier, including political risk, volatility and the dearth of liquidity. Considerably less attention, however, focused on a specific challenge that may be of particular interest to our readers: the lack of a well-developed financial research and information industry in the frontier markets.
What Are Frontier Markets?
According to S&P, frontier markets are those that are “small and illiquid even by emerging market standards.” The S&P/IFC Global Frontier Markets Index includes 24 countries globally, including Bangladesh, Botswana, Bulgaria, Cote d’Ivoire, Croatia, Ecuador, Estonia, Ghana, Jamaica, Kazakhstan, Kenya, Latvia, Lebanon, Lithuania, Mauritius, Namibia, Panama, Romania, Slovak Republic, Slovenia, Trinidad & Tobago, Tunisia, Ukraine and Vietnam.
The frontier markets have several characteristics that make them attractive to money managers. They remain relatively under-followed by institutional investors, which opens up significant arbitrage opportunities for those with an appetite for the risks inherent in investing on the frontier. What’s more, they have relatively low correlation with developed markets, which make them attractive at times when the more developed economies are struggling. In the last five years, while the developed economies have sputtered, the S&P/IFC Frontier Markets Index has had average annual returns of 37%.
Financial Information on the Frontier
In spite of all the attractive qualities of the frontier markets, gathering useful research and information on these markets remains an ongoing challenge. In a presentation entitled “Frontier Markets as an Asset Class,” Alisher Djumanov of Eurasia Capital Management pointed out that few frontier market companies are followed by sell-side analysts. He also noted that there is relatively low transparency in corporate governance in these markets, which calls into question the reliability and consistency of financial data.
While research and data coverage on the frontier is sparse, it is far from non-existent. The conference included several research and data firms that provide information on these markets, including Emerging Portfolio Fund Research (EPFR), which tracks global fund flows (including flows to/from the frontier markets), and Investment Frontiers Research, which provides research and consulting services to hedge funds that are expanding into the frontier markets. What was clear from talking to participants in the conference, however, is that there remains a need for rigorous, on-the-ground primary research.