To start investing in frontier markets is simple but not easy! Everybody can do it, but not everybody will get the desired returns. There are a lot of issues concerning investing in frontier markets. To make it easier for you, we have outlined the main ways you can start investing in frontier markets.
The main issue with investing in frontier markets is the lack of information and financial data concerning some local companies. However, if you search enough, there are ways to bypass this lack of data.
The problem with frontier markets: way to many options!
Having too many options is a good problem. The real issue is that every country has its own political and tax systems, making it difficult to asses two similar stocks from two different countries.
In the last article, we showed the more geographically specific a fund is, the better its long term performance is. However, as always in investing, nothing is set in stone and [also] there are frontier funds without a geographical scope who managed to get decent returns and beat their benchmark indexes.
This is why the first way to invest is not recommended.
Frontier stock picking – a mug’s game!
As an investors, venturing in frontier markets by picking stocks is the worst way to gain exposure.
This way of investing mainly creates headaches.
Excepting the vast amount of stocks to choose from, there are certain factors that single investors are facing in frontier markets.
There are too many factors to consider. Tax or political systems and the on-going changes of this systems are a real headache. A headache that becomes expensive if you don’t pay enough attention to it.
Consumer spending habits and cultural differences are another set of issues.
Even if we manage to overcome the lack of up to date information about tax and political systems, the biggest challenge for your investments will be the lack of financial data.
Even if you manage to find enough financial data concerning a company, another frontier markets problem, a wild west type of problem arises, such as the reliability of this data. Try to beat that as a single investor!
But let’s say enough reliable data is available, the next issue is liquidity. Is there enough liquidity to get exposure at the preferred time, or exit the investment if case of emergencies?
Conclusion: you can get exposure as a lone investor, but the odds are against you. That’s why we move to the next method of investing in frontier markets.
ETFs – convenient way to invest. Plus a hot topic at cocktail parties
We established that for a lone investor, frontier markets are a sort of wild west investing sector. An investor has the odds against him and there are chances that he will carry lots of arrow wounds on his back.
If you are looking for a structured way of investing in frontier markets, then ETFs are best suited to this need.
A quick google search for frontier markets ETFs will display enough familiar names and benchmarks to make an investor comfortable. However, as every investment, ETFs have their pro and cons.
PRO: familiar regulatory and tax treatments. Frontier ETFs from US receive the same treatment as a S&P 500 tracking fund. Also there is a lot of reliable financial data and performance metrics for and investor to be comfortable getting exposure to frontier markets via ETFs. Plenty of liquidity as some ETFs are traded on Nasdaq or NYSE.
CON: Lack of geographical or sector scope. Some ETFs are purely based on market capitalisation. Investing in such an index will get you exposure from financial firms in Middle East to Telecom companies from Sub-Saharan Africa. This way is very hard to get favorable returns over the long run.
Conclusion: Investing in frontier markets ETFs may be cool talking about it, you might get attention at a cocktail party, as long as you don’t specify the poor returns. Remember, the coolness of an investment tends to be inversely proportional to its performance.
Actively managed funds – the smart way
Actively managed funds received a lot of negative publicity due to their lack of performance in developed markets.
However, due to the sheer number or stocks, geographical spread, cultural and legislation differences, to get a decent return, an investor needs a way to aggregate information.
Managed funds offer the possibility of focusing your investment in certain geographic areas or sectors, making it more favorable to decent returns. This way, the stock selection problem is solved.
Frontier markets are peculiar, there is no doubt. As an investor, not only you need a structure in your investment, but also a more hands-on approach to it.
As mentioned, these markets are lacking reliable and timely financial data. With a more hands-on approach, some fund managers can get frontier markets information more timely then your regular news platform.
Already a single investor has an information deficit, why not mitigate it by using a managed fund?
In addition, we demonstrated that the best way to invest in frontier market is by taking a value investing approach. To achieve this, an investor needs not only reliable financial data, but also a more direct approach and if possible a contact with management.
For an investor, we consider the managed funds the best way to gain not only exposure to frontier markets, but also a chance to a decent return.
There is one responsibility the investor is accountable for, no matter the investment method. As always due diligence is required and if a certain way of gaining exposure to frontier markets has been profitable in recent years, it does not guarantee favorable future returns.
All content on DraculaCapital.com is for information purposes only. Do not use this content as investment recommendation. Every type of investment involves the risk off losing investment principal. Frontier Markets presents higher risks than mature markets.