Frontier Markets White Paper April2010

8/8/2019 Frontier Markets White Paper April2010

1/15

Frontier Markets: Overlooked Opportunity?Will Frontier Markets Deliver Stellar Returns like Emerging Markets have?


2/15

April 2010 1

Frontier Markets: Overlooked Opportunity?Emergingmarketequitieshaveexperiencedquitearidesincethe1990s.Whiletheroadhasbeenrocky,

withtheAsiancurrencycrisisbeingjustoneevent,theeventualrewardforlongterminvestorswas

significant.

Today,

emerging

market

equities

have

earned

a

place

in

many

investors

portfolios.

Frontier

marketsmaybeembarkingonasimilarjourney,withthepotentialforlongtermrewardsforthosewho

followthelesstraveledpathofthisriskyassetclass.

Insomeways,frontiermarketsarentasforeignasonemightthink.Forinstance,companieswithglobal

franchises,suchasNestle,Guinness,Unilever,Total,Cadbury,andStandardChartered,allhave

subsidiariesorrelatedcompanieslistedinfrontiermarkets,whicharethemarketsbeyondboththe

developedandemergingworlds.

Anotherpotentiallymajorbenefittofrontiermarketsexposureisdiversification.Eachfrontiermarketis

muchmoreofalocalmarketthanabitplayerontheglobalstage.InSriLanka,a25yearcivilwar

againstaninsurgencygroup,theTamilTigers,cametoanendinMay2009.Thisledtoanimmediate

popin

the

Sri

Lanka

market

and

will

likely

lead

to

apositive

re

rating

of

the

country

over

the

long

term.

Thisbenefitwasnotrealizedbyinvestorsindevelopedandemergingmarkets.Youhadtobeinvestedin

frontiermarketstobenefit.Thatsaid,disasterslikeZimbabwe,whereRobertMugabehastrampled

humanrightsandpursuedeconomicpoliciesthathavecausedmeteoricinflation,arepartofthefrontier

marketslandscapeaswell.Overall,becauseoftheidiosyncraticrisksaffectingeachfrontiermarket,

whenonecalculatesfrontiermarketsaggregatevolatility,theyarelessvolatileasagroupthan

emergingmarketsandaboutequalinvolatilitytodevelopedmarkets.

Certainly,frontiermarketscomewithsignificantrisks.Frequentlytherisksareknownandpricedinto

thesecurities,andtheyarenotnecessarilydifferentthantherisksoneseesinemerginganddeveloped

markets.Infact,manyinvestorshaveenjoyedthebenefitsofexposuretoemergingmarketsinrecent

yearsbut

view

frontier

markets

as

too

risky,

too

out

there.

Avoiding

frontier

markets

doesnt

guaranteeavoidingcountryspecificorsystemicrisksinthedevelopingworld.Venezuelawaspartofthe

MSCIEmergingMarketsIndexwhenPresidentHugoChavezdecidedtonationalizeitsmainoilcompany.

Itisnowafrontiermarket.WhenRussiashutdownitsstockexchangeseveraltimesinthefallof2008,it

waspartoftheMSCIEmergingMarketsIndex.Russiaremainsanemergingmarkettoday.

Inthedevelopedworld,risksarefrequentlynotproperlypricedintomarketsbecauseoftheperception

ofstability.TheriskofacollapseintheU.S.bankingsystemcertainlywasntpricedintothemarketsin

2007,thoughitwasagenuinerisk.Moreover,afewfrontiermarketshavefiscalfortunesthatareakin

todevelopedmarketsorbetter.Forexample,asofDecember2009,itwaslessexpensivetoinsure

againstadefaultonSloveniangovernmentbonds(ratedAAbyS&P)thantoinsureagainstadefaulton

thetopratedU.K.governmentdebtbasedoncreditdefaultswapprices.ClearlySloveniaoffersabetter

creditriskthandiceydevelopedmarketslikeGreece.

Frontiermarketsofferthepotentialforstronglongtermreturnsanddiversificationbenefitsata

reasonablelevelofvolatility.Therearecaveatstothoseassertionsandmuchtothinkaboutbefore

investing.Thispaperservesasanintroductiontofrontiermarkets,discussingboththeadvantagesand

risksassociatedwiththisassetclass.


3/15

April 2010 2

What are Frontier Markets?Thereisnoprecisedefinitionoffrontiermarkets.Generally,theyareconsideredtobelowliquidity

marketsoutsideofdevelopedmarkets(definedastheMSCIEAFEIndexconstituentsandCanada)and

emerging

markets

(defined

as

the

MSCI

Emerging

Markets

Index

constituents).

These

outsiders

encompass7080stockmarketsthattotalapproximately$233billioninmarketcap1,whichrepresent

1%ofthetotalworldmarketcapitalization.2 Thelistofcountriesprovidedbelowisconsideredtobethe

broadfrontieruniverse.

1MarketcapofS&PFrontierBMIIndex12/31/2009

2ComparingS&PFrontierBMIIndextoMSCIAllCountryWorldIndex12/31/2009

Albania Cameroon Guyana Malawi Panama* Swaziland

Armenia CapeVerde Iran Maldives PapuaNewGuinea Tanzania

Azerbaijan CaymanIslands Iraq Malta Paraguay Togo

Bahrain* Colombia* Jamaica Mauritius Qatar* Trinidad&Tobago

Bangladesh* CostaRica Jordan* Moldova RepublikaSrpska Tunisia

Barbados Coted'Ivoire* Kazakhstan* Mongolia Romania* U.A.E.*

Belarus Croatia* Kenya* Montenegro SaudiArabia Uganda

Benin Cyprus* Kuwait* Namibia Senegal Ukraine*

Bermuda Ecuador KyrgyzRepublic Nepal Serbia Uruguay

Bolivia ElSalvador* Latvia Niger SlovakRepublic Uzbekistan

Bosnia Estonia* Lebanon* Nigeria* Slovenia* Venezuela

Botswana Fiji Libya Oman* SriLanka* Vietnam*

Bulgaria* Georgia* Lithuania* Pakistan* St.Kitts&Nevis Zambia

Cambodia* Ghana Macedonia Palestine Sudan Zimbabwe

*MemberofS&P/IFCGExtendedFrontier150Index Bolded MemberofMSCIFrontierMarketsIndex

Source:CaravanCapitalManagement,LLC

FrontierMarketsUniverse


4/15

April 2010 3

PerformanceTheperformanceoffrontiermarketsneedstobesufficientlyenticinginordertomaketheinherentrisks

acceptabletoinvestors.Whiledataisonlyavailablebackto1995,thegraphbelowrevealsthatfrontier

markets

have

fared

better

than

the

developed

world

and

emerging

markets

over

most

time

periods.

Untiltheendof2007,frontiermarketsreturnswereupinthestratosphere.Thecrashof2008,

however,broughtthembackdowntoearthandclosertootherassetclasses.Forinvestorslookingto

establishnewpositionsinfrontiermarkets,thiscrashisapositivedevelopment.Thefourfrontier

marketsstrategiesintheeVestmentAlliancedatabasewere,onaverage,inthebottom99thpercentile

ofemergingmarketsmanagersfortheoneyearperiodendingSeptember30,2009.

AsofDecember31,2009 S&P500 MSCIEAFE MSCIEM MSCIFM S&PFM1Year 23.45% 27.75% 74.49% 6.74% 9.11%

3Year(annualized) 7.70% 8.66% 2.73% 12.96% 12.15%

5Year(annualized) 1.65% 0.85% 12.79% 0.19% 1.08%

10Year(annualized) 2.72% 1.07% 7.29% N/A 10.16%

Since

12/1995

(annualized)

4.30%

2.38%

5.62%

N/A

4.74%

Source:Bloomberg,MSCIandS&P.

0

50

100

150

200

250

300350

400

450

Dec95

Jun96

Dec96

Jun97

Dec97

Jun98

Dec98

Jun99

Dec99

Jun00

Dec00

Jun01

Dec01

Jun02

Dec02

Jun03

Dec03

Jun04

Dec04

Jun05

Dec05

Jun06

Dec06

Jun07

Dec07

Jun08

Dec08

Jun09

Dec09

Adjuste

dIndex

Leve

l

HistoricalPerformance

S&P500 MSCI

EAFE

MSCI

EM MSCI

Frontier S&P

Frontier

Composite*

*TheS&PFrontierComposite IndexwasreplacedbytheS&PFrontierBMIIndexon11/1/08.

Source: Bloomberg,MSCIandS&P.


5/15

April 2010 4

Historical ValuationsFrontiermarketshavehistoricallybeenlessexpensivethandevelopednonUSmarketsbasedonprice

toearningsandpricetobookratios,butmorerecentlythetrendhasbeentowardsconvergenceon

valuation.

Since

2000,

frontier

and

emerging

markets

have

had

similar

valuations,

with

the

largest

divergenceoccurringin2009,asemergingmarketsralliedmuchmorestronglythanfrontiermarkets.

Itisalsoworthnotingthatthemoreeasilyinvestablefrontiermarketshaveroutinelyhadmuchhigher

valuationsthanthemoreexoticfrontiermarkets.

Dec09 FrontierP/E well

belowothermarkets

0

10

20

30

40

50P/EComparison Monthly(1/1/00 12/31/09)

S&P500 MSCIEAFE MSCIEM S&PFrontier

Source:Bloomberg,MSCIandS&P.

P/E(Tra

iling

12mo

.)

Whilemostequityclassesreboundedheavilyin2009,frontiermarketsremainedlargelyoverlooked.At

theendof2009,emergingmarketswereonly26%offoftheir2007peak.Insharpcontrast,frontier

markets

were

still

down

53.7%.

This

could

be

a

sign

of

opportunity

for

investors.

28.0%

26.2%

33.8%33.9%

26.0%

53.7%

70%

60%

50%

40%

30%

20%

10%

0%

AmountIndexLevelsStillDown

from'07'08Peaks

Dataasof12/31/09

Source:Bloomberg


6/15

April 2010 5

Potential Diversification BenefitsOneattractivepointaboutfrontiermarketsistheirlowcorrelationrelativetootherequityassetgroups.

Thechartbelowcomparesthecorrelationsoffrontiermarkets,emergingmarkets,anddevelopednonUS

markets

against

the

US

Market

(Russell

3000

Index).

The

data

shows

that

frontier

markets

have

been

lesscorrelatedtotheUSMarketthanemerginganddevelopednonUSmarkets,particularlyovera 14

yeartimeperiod.

0.0

0.2

0.4

0.6

0.8

1.0

MSCIEAFE MSCIEM Frontier

CorrelationstotheUSMarket

1yr 3yr 5yr 14Yr

*Basedonaverageof:1)S&PFrontierComposite2)MSCIFrontierIndexand3)S&PFrontier

Extended150.

**Basedon averageof:1)S&PFrontierCompositeand 2)MSCIFrontierIndex.

Note:S&PFrontierCompositeIndex was

Source: Bloomberg,MSCIandS&P.

****

replacedbytheS&PFrontierBMIIndexon11/1/08.

Themorerecentone andthreeyearperiodssuggestthatfrontiermarketsarebecomingmore

correlatedtoUSMarkets.Thisistobeexpectedasfrontiermarketsgrowandevolveintomore

developedmarkets.

However,

this

process

should

be

slow

and

is

unlikely

to

occur

in

such

adramatic

shiftasthechartssuggests.Thefinancialmeltdownof2008andresultingbreakdownofglobalfinancial

marketsincreasedshorttermcorrelationsacrossallequityassetclasses.Withnowheretohide,frontier

marketscorrelationsshifteddramaticallywiththerestofthefinancialmarket.Interestingly,if2008was

excludedfromthecorrelationcalculationsandtheenddatewasDecember31,2007,frontiermarkets

correlationstotheUSforaoneyearandfiveyeartrailingperiodwouldbe0.27and0.11,respectively,

vs.0.66and0.69foremergingmarketsand0.71and0.81forEAFE.Whenmarketsreturntoamore

normalstate,wewouldexpectfrontiermarketstolargelyresumetheirhistoricallylowcorrelations.

0

0.1

0.20.3

0.4

0.50.6

0.7

0.8

July1998 June

2003

July2003 June

2008

January2005

December2009

CrossCorrelationBecausefrontiermarketsaresmallandrelativelyisolatedfromoneanother,

especiallycompared

to

their

more

globalized

counterpartsintheemergingmarketsspace,

theyexhibitlowcrosscorrelationsfrom

countrytocountry.Thislowcrosscorrelation

canbeutilizedasanimportanttoolfor

diversificationandreducingoverallportfolio

volatility.Vietnamsinflationissuedoesnt

affectSriLanka,andSriLankassuccessover

theTamilTigersmilitarygroupdidntaffect

Vietnam.

Frontiers Emerging BRIC's

Source:Caravan CapitalManagement,LLC


7/15

April 2010 6

VolatilitySomeinvestorsmayviewfrontiermarketsasamorevolatileversionofemergingmarkets.Onacountry

andstockspecificbasis,thismaybetrue,butawelldiversifiedfrontiermarketsportfoliomaysurprise

some

with

its

comparatively

low

volatility.

Frontier

markets

in

aggregate

have

historically

been

less

volatilethanemergingmarketsandcomparabletoEAFE.Thegraphbelowillustratesthistrend.

Note:ThespikeinvolatilityforFrontiermarketsinFebruaryof2007isduetoaddingMSCIFrontierMarketstothecalculation.Beforethatdate,onlyS&PFrontierCompositedatawasused.Afterthatdate,theS&PFrontierCompositewasaveragedwithMSCIFrontierMarkets.MSCIFrontierMarketshashighervolatilitybecauseitcoversfewercountriesandfewerstocks.TheMSCIindexalsohashigherexposuretothemorevolatileGCC(GulfCooperationCouncil,whichrepresentssixMiddleEasterncountries).

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

AnnualizedStandardDeviation

3YearRollingStandardDeviation

S&P500 MSCIEAFE MSCIEM S&P&MSCIFrontier*

Source:Bloomberg,MSCIand S&P.

Typically,themostvolatilefrontierregionsare

EasternEuropeandtheMiddleEast.Theless

developedandlessliquidafrontiermarket,the

lessvolatileitsreturnstendtobe.Thisistruein

partbecausemarketsthattradelessfrequently

haveless

price

movement

captured

by

volatility

statistics;itdoesnotmeanthattheyarenecessarilylessrisky.

Mostfrontiercountrieshavelowervolatilitythan

theaverageemergingmarketscountry.Inthe

aggregate,frontiermarketsalsohavealower

volatilitythanemergingmarkets.Thegraphtothe

rightcomparestheS&PFrontierCompositetothe

S&PIFCIIndex,whichisanemergingmarkets

index.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

AverageCountryVolatility IndexVolatility

VolatilityComparison

S&PFrontierComposite*

S&P/IFCICountries

*S&PFrontier Compositeincludes S&PFrontierBMIexGCC

dataafter10/2008

Basedon10yearmonthly returnsasof12/2009

Source:CaravanCapitalManagement,LLC


8/15

April 2010 7

RisksThoughfrontiermarketshavemanypositiveattributes,theyarerisky.Frontiermarketsnotonlyhave

theusualrisksassociatedwithinternationalinvesting,theyhaverisksthatareparticulartothemor

more

severe,

such

as

liquidity

risk,

country

risk,

and

local

market

dynamics.

Liquidity RiskFrontiermarketslowliquiditylevelscanmakeenteringandexitingpositionschallenging.Lowtrading

volumerequireslargeinvestorstobeslowonthewayinandslowonthewayout.Thisrequirestiminga

purchasecorrectly,ormoreimportantly,notliquidatingapositiontooquicklytoavoidlosingsignificant

valueonthewayout.

Thetypicalbid/askspreadforfrontiermarketsissignificantlylargerthanthedevelopedworld.The12

monthrollingmedianspreadtippedover3%in2005.Thisspreadhasalargeimpactonthelevelof

tradingforfrontiermarketassetmanagers.Highturnoverstrategiesdonotfarewellinanenvironment

whereseveralpercentagepointsarelostthroughmatchingupabuyerandaseller.

Theuniverseofstocksforthebid/askanalysiswasfoundthroughascreeninBloomberg.Theuniverserepresentsallstockswithamarketcapover$50millioninthecountrieslistedonpage2.Note:Bermuda,Panama,andtheCaymanIslandswereexcludedbecausetheycontainedalargeamountofcompaniesthatdidnothavesignificantbusinessoperationsinthosecountries.A

lack

of

liquidity

is

one

reason

that

active

managersdifferconsiderablyintheir

approachestofrontiermarkets.Theactive

managersthatfocusonmoreliquidareasofthefrontiermarketscanrunmuchlargerassetpools,but

themanagerswhofocusonthelessliquidareasofthefrontiermarketshaveaccesstowhatislikelyto

bethebetterlongterminvestment.Thesuperioropportunitysetcomesatthecostofhigher

transactioncosts,lowerliquidityand,often,highermanagementfees.

Country RiskInmostdevelopedcountriesandthelargeremergingcountries,investorsareusuallyconcernedwiththe

standardcountryriskssuchaseconomic,political,andcurrencyrisk.Movingintothefrontiermarkets,

investorsbegintogivemoreconsiderationtoissueslikethestabilityofacountrysgovernmentorthe

potentialforwar.Goodresultscanmorphintoproblems,too.Rapideconomicgrowthmayleada

governmenttohurriedlyenactpoliciestoprotectlocalcurrenciesorbusinessesfrominflation.Other

typesofriskinclude:corruptioninbusinessandpolitics,publichealthconcerns,andlimitationson

economicandpoliticalfreedom.Inextremecases,theseproblemscanleadtoaninvestmentbeing

wipedoutovernight.Inothersituationstheycouldhavelittletonoeffectonaninvestment.Itis

importanttorecognizetheserisksandtheirpotentialrepercussionstoaportfolio.

0%

1%

2%

3%

4%

Bid/AskSpread

Trailing12Month MedianSource:Bloomberg


9/15

April 2010 8

Local Market DynamicsInexperiencedLocalInvestorsManyfrontiermarketsarestilldominatedbylocalinvestorswhoareinexperiencedcomparedtotheir

developedworldcounterparts.Localinvestorsunsophisticatedapproachtendstohavealarger

presencein

frontier

markets

than

in

developed

or

emerging

markets.

From

an

investor

standpoint,

irrationalmarketparticipantscanleadtoirrationalmarketbehavior,whichleadstoshortterm

headachesbutlongtermopportunities.

TransparencyGoodinformationflowisfrequentlylackinginfrontiermarkets.Languagebarriers,lackoftimely

financialreporting,andalackofinsightfulresearchareaddedchallengestoanalysis.Althoughallof

thesecharacteristicsaddariskpremiumfortheunknown,thisopacitycanalsobeasourceofalphafor

anactivemanagerwhoknowswheretolookandwhattolookforinthefrontiermarketsspace.

TransactionConcernsWhen

purchasing

local

shares

in

many

frontier

countries,

there

can

be

additional

hoops

to

jump

through

tocompletethetransaction.Somefrequentissuesthatariseforforeigninvestorsaretaxes,restrictions

toforeigninvestment,dealingwithforeignexchanges,andfindingatrustworthybroker.Manyfrontier

marketsstrategiesuseAuerbachGrayson,abrokerageinNewYorkCity,tonavigatethelocalbroker

sceneofmanyfrontiermarkets.CTChasmetseveraltimeswithJonathanAuerbach,coFounderand

ManagingDirectorofthefirm,tounderstandtheirroleintheprocess.


10/15

April 2010 9

What is the best way to invest in Frontier Markets?Active ManagementTherearecasesforbothactiveandpassivemanagementinmostequityassetclasses,butfrontier

markets

make

a

particularly

strong

case

for

active.

Passive

frontier

markets

options

are

limited

and

generallyregionspecific,whileactivemanagershavetheopportunitytosearchthebroadfrontier

marketsforreturns.(Pleasenotethatwhenwediscusspreferringactiveexposuretopassiveexposurein

frontiermarkets,thepassivestrategieswetakeissuewitharegenerallyexchangetradedfundsi.e.ETFs.

WestillsupportexposuretotheParametricEatonVanceEmergingMarketsstrategy,astructured

emergingmarketsstrategythatinvestsinbothemergingmarketsandfrontiermarkets.)

Inaddition,skilledactivemanagershaveagreatopportunitytoexploittheinefficienciesembeddedin

frontiermarkets.Localinvestorsmaynothavetheexpertisetoevaluateacompanyscurrentfinancial

situationandfuturegrowthprospects,andoutsideinvestorsfaceobstaclesbecausesellsidecoverageis

quitelimited.Aseasonedmanagercanunlockalphaandcontrolrisksthroughthoughtfulduediligence

atbothacountrylevelandastocklevel.

Adownsideofactivemanagementisthatitaddsanotherlayerofriskinanalreadyriskyarena.Frontier

activemanagementalsotendstobemoreexpensivethanotherassetclasses.Thiscancomefrom

highertransactioncostsandoperatingcosts,aswellasapremiumforaskilledmanager.

Passive ManagementThroughoutthepastdecade,anumberofexchangetradedfunds(ETFs)havebeenlaunchedthatmostly

coverportionsofthefrontiermarkets,butnonereplicatethebroadindices.Forinstance,therearea

fewMiddleEastETFs,butnonethattracktheMSCIFrontierIndexortheS&PFrontierBMIIndex(see

page11foralistofavailableETFs).

Toget

broad

exposure

to

the

frontier,

it

is

our

view

that

these

passive

investments

are

insufficient.

The

DeutscheBankETFgivesthebestbroadfrontiermarketexposure,butitstillonlycontains40stocksand

thereislimitedaccesstothefund.NoneoftheotherETFscanstandaloneasgoodexposuretothe

frontier.

WhyisntthereaUSbasedETFthattracksoneofthebroadbasedindicesdiscussedatthebeginningof

thispaper?Therearelikelyanumberofreasonswhythishasntcometofruition.AnETFproviderfaces

severalchallengesincludingtrackingerror,liquidity,andtransactioncosts.Alargenumberofstocksin

frontierindiceswouldrunintoliquidityconstraints,whichcouldprovetobecostlyandcreate

substantialtrackingerror.Itisdifficulttospeculatewhensuchproductswillbelaunchedbecauseofthe

variouschallenges.

Atthispoint,passivestrategiesdonotmakesenseunlessinvestorsareaimingforaspecificand

concentratedfocusonasubsegmentofthefrontieruniverse.


11/15

April 2010 10

ConclusionFrontiermarketsappeartobeaveryattractivesegmentinwhichtoallocateriskcapital.Thisisbasedon

theattractivevaluationsrelativetotheirlongtermpotential,diversificationbenefitsduetolowcross

country

correlations,

strong

economic

growth,

and

the

potential

for

active

management

to

add

value.

Whenaninvestorallocatestofrontiermarkets,itisimportanttodiversifyacrosscountriesandregions

tominimizeidiosyncraticrisk.

AtCTC,werecommendcomplementingtheemergingmarketsequityportionofaportfoliowithfrontier

marketsexposure.Inmosteconomicenvironments,exposuretofrontiermarketsshouldnotexceed

25%oftheemergingmarketsportionofaportfolioandshouldbeinlinewithspecifiedrisktolerances.

Wealsorecommendsteeringclearofpassiveproductsinthefrontiermarketsspace,asthecurrent

offeringsdonotgivesufficientbroadbasedexposuretotheassetclass.

ByCTCTraditionalResearchTeam

Source:CTC


12/15

April 2010 11

ThefollowingETFsarecurrentlyavailable:

Name Ticker Comments

Claymore/BNY

MellonFrontier

MarketsETF

FRN ThisfundisthebroadestfrontierETFavailable.Thatbeingsaid,it

hasserious

limitations.

It

invests

almost

entirely

in

ADRs.

Most

frontierstocksareonlyavailablethroughlocalshares,which

drasticallylimittheETFsopportunityset.Inaddition,alarge

percentageoftheholdings(59%asof12/31/09)areconcentrated

inonlythreecountries:Chile,Poland,andEgypt.Manywould

arguethatthesethreecountrieshaveclosercharacteristicsto

emergingcountriesthanfrontier.Otherfrontiercountriessuchas

Kuwait,Vietnam,Nigeria,andKazakhstanhavelittleorno

representationintheETF.OnepositivepointistheETFslow

expenseratio,whichisexpectednottoexceed65bps.Investors

needtoconsiderthepreferencetowardADRsandthelarge

countryfocus

areas

before

adding

FRN

to

their

portfolio.

3

PowerShares

MENAFrontier

CountriesETF

PMNA PMNAreplicatestheNASDAQOMXMiddleEastNorthAfricaIndex

throughtheuseofADRsandGDRs.TheMENAIndexincludes

Kuwait,Bahrain,Qatar,UAE,Oman,Lebanon,Egypt,Jordan,and

Morocco.Theindexrebalancesbasedona20%maximumcountry

allocationand10%maximumsinglestockallocation.Typicalof

mostfrontiermarketindices,financialsarethelargestsectorof

PMNAatapproximately5060%.Theexpenseratioismodestat

0.95%.

MarketVectors

AfricaETF

AFK AFKtrackstheDowJonesAfricanTitans50Indexandiscomprised

of50Africanstocks.SouthAfricaandNigeriamakeupover50%

andbanksrepresent38%ofthefund.Over90%ofconstituentsare

below$6billioninmarketcap.Theexpenseratioisadetractor,as

itiscomparabletoactivemanagementat120bps.4

MarketVectors

GulfStatesETF

MES MEStrackstheDowJonesGCCTitans40Indexandiscomprisedof

40stocksinKuwait,Oman,UAE,Qatar,andBahrain.Kuwaitmakes

up60%andbanksrepresent45%ofthefund.Over85%of

constituentsarebelow$6billioninmarketcap.Theexpenseratio

isalsocomparabletoactivemanagementat138bps.5

WisdomTree

MiddleEast

DividendFund

ETF

GULF ThisETFtrackstheWisdomTreeMiddleEastDividendIndex,which

isadividendweightedindexfocusedonMiddleEastcompanies

thatpayregularcashdividends.Ithas65stocksfromKuwait,

Egypt,Qatar,Morocco,UnitedArabEmirates,Jordan,Bahrain,and

Oman.5

SPDRS&P

Emerging

MiddleEast

andAfricaETF

GAF GAFfollowstheS&PMiddleEastandAfricaBMIIndex.Although

theindexnamemayleadsometobelievethisisafrontierindex,it

isessentiallyaSouthAfricanandIsraeliindex.SouthAfricaand

Israeltogetherrepresentapproximately8090%oftheholdings,

3Claymore.com

4Vaneck.com

5Wisdomtree.com


13/15

April 2010 12

whichmaketheindexappearmoreemergingmarketsthan

frontiermarkets. Theexpenseratioismodestat59bps.6

dbxtracker

S&PSelect

Frontier

LU0328476410 ThisDeutscheBankdbxtrackerfollowstheS&PSelectFrontier

Index,whichcontainsthe40mostliquidstocksintheS&Pfrontier

universe.It

is

available

through

aSICAV

and

is

only

traded

on

the

LondonStockExchange,XTERA,SIXSwissExchange,andBorsa

Italia.ItisnotavailableforUSinvestors.

6Spdrs.com


14/15

April 2010 13

Notes on Frontier Markets IndicesIndicesmaydifferintheirdefinitionsoffrontiermarkets.Indexprovidershavetheirowninterpretations

andscreensforfrontiercountriesandcompanies.Asanexample,oneindexprovidermaydeema

countrys

trading

volume

as

adequate,

while

another

may

exclude

it

as

too

low.

Note

that

active

managersalsohavetheirowninterpretationsoffrontiermarkets,whichmayleadthemtoseek

opportunitiesoutsideoftheindices.Thiscanmakefrontierinvestmentschallengingtobenchmark,

emphasizingtheimportanceofevaluatingindexmethodologies.Thefollowingisalistofwellknown

frontiermarketsindices:

MSCIFrontierMarketsIndex

Thisindexincludesroughly180stocksfrom22countriesthatMSCIconsiderstobeliquidandforeign

investorfriendly.Thisindexwillincludemostofthelargercompaniesinthefrontiermarketsuniverse.

Asofyearend2008,Kuwaitwas36%andfinancialcompaniesrepresented62%oftheindex.Theindex

startedinMayof2002.7

S&PFrontier/IFC

Composite

ThiswastheoriginalfrontiermarketsindexcreatedbytheInternationalFinanceCorporation(IFC),

whichwaslaterpurchasedbyStandardandPoors.Theindexcontained24countries.Thisindexwas

discontinuedon10/31/2008byS&Ptoencourageadoptionoftheircurrentproductlineup,theS&P

FrontierBMIIndex.Allofthereturndatabefore2002usedforanalysisinthispaperisfromthisindex.It

isalsotheonlyreturndataavailablefor19952002.

S&PFrontierBroadMarketIndex(BMI)

TheS&PFrontierBroadMarketIndexincludes616companiesin34countries.Asofyearend2008,

Kuwaitwas27%andfinancialcompaniesrepresented63%oftheindex.TheFrontierBMIencompasses

morecountriesandcompaniesthantheotherindices,givingFrontierBMIthelargestopportunityset.

Althoughthis

index

is

more

comprehensive,

the

downside

is

that

it

will

include

stocks

and

countries

that

somedonotconsiderinvestable.TheindexstartedinNovemberof2008.8

S&P/IFCGExtendedFrontier150Index

Theindexiscomprisedof150stocksfrom27countries.Thisindexisuniquebecauseitputsa15%cap

ontheweightofanycountry.ThisputsKuwaitata15%cap,whichisabouthalfoftheotherindices

weight.ThisindexstartedinJanuaryof2005.

S&PSelectFrontier

AsubsetoftheExtendedFrontier150Index,thisindexcontainsthelargestandmostliquid40stocksin

theS&P/IFGCExtendedFrontier150index.Althoughitisasubsetofthe150,itisnotconstructedwitha

15%countrycap.Asofyearend2008,Kuwaitwas30%oftheindex.ThisindexstartedinJanuaryof

2005.

InvestmentFrontiersResearch(IFR)ExoticFrontiersIndex

TheExoticFrontiersIndexiscomprisedofstocksinearlystagefrontiercountries.Spanning16countries,

theindexis43%financialsandhasnocountryweightover13%.Generallyspeaking,theindexcontains

lessliquidstocksthatarerarelycoveredbyanalysts.Assuch,correlationsbetweentheindexandother

7Datafrommscibarra.com

8Datafromstandardandpoors.com


15/15

April 2010 14

assetclasseshavebeenlow.TheExoticFrontiersIndexislesscommonlyusedcomparedwiththe

previouslydescribedindices.

ItisnoteworthythatSaudiArabiaisnotpartofanyoftheaforementionedindices.SaudiArabiahas

manysimilar

characteristics

to

frontier

countries,

but

currently

has

limitations

on

foreign

investment.

Thereareseveralotherindicesthatcoverspecificcountriesorgeographicareaswithinthefrontier

framework.Forinstance,theMSCIGCC(GulfCooperationCouncil)Indexincludessixcountriesinthe

MiddleEast,andtheS&PAfricaFrontierfocusesonthecontinentofAfrica.

DisclosureThisinformationdoesnotconstituteanoffertosellorsolicitationtobuyanysecurityorinvestmentproduct,andisforinformationalpurposesonly.Anyoffertosellorsolicitationtobuyaninterestinanysecurity,investmentproductorfundmayonlybemadebyreceivingaconfidentialprivateofferingmemorandumorsimilardocumentfromtheinvestmentmanager,whichdescribesthematerialtermsandvariousconsiderationsrelatingtosuchsecurity,investmentorfund.Thisinformationdoesnottakeintoaccounttheinvestmentobjective,financialsituationorparticularneedsofanyindividualorentity.Anytaxissuesidentifiedinthismaterialaregeneralinnatureanddonotnecessarilyapplytothepersonalcircumstancesofanyclient.Aclientstaxorlegaladvisorshouldbeconsultedregardinghowtaxissuesaffecttheclientsspecificcircumstances.ThismaterialisbasedoninformationCTCbelievesisreliable,butCTCdoesnotrepresentthatitisaccurateorcomplete,anditshouldnotberelieduponassuch.CTCdoesnotguaranteetheinformationcompiledfromexternalsources,andperformanceinformationshouldnotberelieduponasthesolesourceforinvestmentdecisions.Thesematerials,andrelatedopinions,arecurrentasofthedatesnoted.Historicalperformanceshouldnotberelieduponasapredictoroffutureperformance.Thisinformation,includinganyrecommendationsmadebyCTCConsulting,isconfidentialandproprietarytoCTCandisprovidedsolelyforusebyCTC'sclientorprospectiveclient.Theclientanditsemployees,advisorsandotheragentsmaynotcopythisreportordistributeordisclosethisinformationtoanythirdparty,exceptwiththeexpresswrittenconsentofCTCorasrequiredbylaworanyregulatoryauthority.CTCConsulting,LLCisaSECregisteredinvestmentadvisor.

Documents

Frontier Markets White Paper April2010