Funds flock to frontiers despite risks

STOCK markets in big emerging-market countries like China, Brazil and Russia have been sagging. But the returns have been splendid for their oft-overshadowed smaller siblings - frontier markets like Kazakhstan, Kenya and Kuwait. Mutual funds that invest in the frontiers have surged, according to Morningstar, returning an annualised average of 5.9 per cent over the three years through March. By contrast, emerging-market funds have lost an annualised average of 0.3 per cent in the same period.

Frontier markets, as the name implies, are at the outer edge of publicly traded investments. They are among the least developed stock markets, though not necessarily in countries with the least developed economies. "People make the mistake of thinking of the frontiers as the poorest countries, but the definition is really about capital-market access," said Oliver DM Bell, manager of the T Rowe Price Africa & Middle East fund.

Some of the countries in MSCI's Frontier Markets Indexes do have low per capita incomes, including Bangladesh, Pakistan, Sri Lanka and Vietnam. But the group also includes Argentina, a middle-income country that has imposed controls on foreign investment, and Kuwait, whose per capita gross domestic product nearly equals that of the US but whose stock market is still developing.