Anyone else in frontier markets?

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ljb
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Anyone else in frontier markets?

Post by ljb »

I have 4% of my portfolio set aside for play/risky investments. Some years ago I decided to put half of my play money into frontier markets. I chose this etf:. iShares MSCI Frontier 100 (ticker=FM). Being the boglehead that I am, I chose FM because:

1) it had the lowest ER I could find among frontier markets funds, even though it is 79bp.
2) it was the only index fund I could find among frontier markets. It tracks the MSCI Frontier Markets 100 index.

I've lost some money on it, but not too much. I still like the idea of having an allocation to frontier markets, but that 79bp ER grates on me. Anyone else in frontier markets? What is your approach and why?

Thanks,
Lisa
raveon
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Re: Anyone else in frontier markets?

Post by raveon »

Around 2005/6, I looked into TRAMX (T. Rowe Price Africa and Middle East Fund). It started at $10. Looking at it today, it is $8.53. So more than a decade of no returns. At that time, emerging markets (BRICs) /frontier markets were the hype. I decided not to invest in TRAMX because of 1) high expense ratio, 2) geo-political risk, and 3) lack of any good knowledge about these countries and what good/services they produce that is unique to them. The only thing I read about was that China was investing heavily in Africa. I suspect most of it had to do with precious metal and natural resources. If I look at the Vanguard Precious Metal Fund (which bizarrely has been renamed into something like Vanguard Capital Cycle Fund) and TRAMX from 2009, they kind of look identical.

For a small investor, I decided it was just better buying the Total International Stock Market Index and live with that.
Last edited by raveon on Mon Dec 31, 2018 6:35 pm, edited 1 time in total.
badger42
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Re: Anyone else in frontier markets?

Post by badger42 »

I looked at this fund, but decided that 24% Kuwait seems like a really non-diversified investment, especially given their history of being invaded (mods: I'm thinking Gulf War, nothing specific about current leadership). 24% Kuwait plus 16% Vietnam and 16% Argentina means you've got more than half the fund in 3 rather small countries (in terms of economy size).

It just doesn't seem to be that compelling of an asset class, to me.
Good Listener
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Re: Anyone else in frontier markets?

Post by Good Listener »

So you have 4% of your assets in frontier markets. And the purpose is.... to play?
gtwhitegold
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Re: Anyone else in frontier markets?

Post by gtwhitegold »

I personally have a similar allocation to Frontier Markets divided evenly between FM and FRN (Invesco Frontier Markets ETF). Frontier Markets have lower correlations with US and Developed International Equities than Emerging Market Equities. They are significantly riskier however. Main reason that I didn't use a mutual fund is because most of them invest in more developed countries like the Philippines (the Philippines are considered Emerging and not Frontier by most index providers.)
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Re: Anyone else in frontier markets?

Post by whodidntante »

EMFM is a bit cheaper, but requires trader Kung Fu. The spreads are wicked, but that is often offset by the discount versus NAV. I'm surprised they haven't liquidated it yet.
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JoMoney
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Re: Anyone else in frontier markets?

Post by JoMoney »

Yes and no.
I'm sure I've got some exposure there. Is there anywhere on earth where Coca-Cola isn't?
..but no, I don't hold foreign listed stocks.
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Re: Anyone else in frontier markets?

Post by nisiprius »

The total market capitalization of the MSCI Frontier Markets Index) is $0.112 trillion.

The total market capitalization of the FTSE Global All-Cap Index is $49 trillion.

Just to be clear, we are talking about putting 4% 2% of a portfolio into 0.23% of the world's stocks.

Frontier markets. Tall tales and true from the legendary markets.

And the question I have is this: would ljb be doing the same thing if there were something called "fantasy markets" (the happiest markets of them all?)

Image
Last edited by nisiprius on Tue Jan 01, 2019 11:31 am, edited 1 time in total.
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unclescrooge
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Re: Anyone else in frontier markets?

Post by unclescrooge »

My play money is in tencent.

It is 0.5% of my retirement account.
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Re: Anyone else in frontier markets?

Post by AlohaJoe »

unclescrooge wrote: Mon Dec 31, 2018 9:24 pm My play money is in tencent.

It is 0.5% of my retirement account.
That's not a frontier market, though.
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Re: Anyone else in frontier markets?

Post by codedude »

At one point I had 1% of portfolio in the ishares frontier markets (FM) ETF for some increased diversification as an experiment.

After some time, I realized that the 1% position was consuming 10% of portfolio expenses, and there was not much of a diversification benefit. So I closed out the position when I needed money for a down payment.
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ljb
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Re: Anyone else in frontier markets?

Post by ljb »

Nisiprius, thanks for responding, because you are one of my favorite and most respected contributors here.

As I said, I only put *half* of my 4% play allocation in FM, or just 2%. I don't think I will reveal what I put the other 2% in 😉.

Thanks for the dollar figures on the market cap of frontier markets being only 0.23%. I have read other figures higher -- Investopedia lists it as 2% - but your data from MSCI is more credible. I had been thinking that about 1% of the world's investible assets we're in frontier markets, so allocating 2% of my portfolio was a 100% overweight, but that's probably not so accurate.

Lisa
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Re: Anyone else in frontier markets?

Post by bluquark »

I think that in theory, these markets have some appeal, but the way to invest is high-effort shoe-leather private capital, not buying an ETF. To extend the "frontier" analogy, nobody got rich off the 1800s gold rush by sitting around in Europe and passively redirecting their money.
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juliewongferra
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Re: Anyone else in frontier markets?

Post by juliewongferra »

raveon wrote: Mon Dec 31, 2018 5:57 pm Around 2005/6, I looked into TRAMX (T. Rowe Price Africa and Middle East Fund). It started at $10. Looking at it today, it is $8.53. So more than a decade of no returns.
I don't have an opinion on TRAMX, but this is totally disingenuous, because you are comparing share price and completely ignoring dividends and capital gains distributions along the way. (Also, past performance is no indicator of future returns; the world is different in 2019 than it was in 2005.)

Lisa, there may be other reasons to avoid TRAMX, but "more than a decade of no returns" based on the share price alone isn't one of them. Good luck!

Cheers,
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Re: Anyone else in frontier markets?

Post by msk »

I happen to reside in a country with an economy so small it does not even qualify as a Frontier Market. Nevertheless for the past 30+ years my target stocks allocation was 50% in this tiny market with 50% worldwide. I am slowly cutting down that local allocation to nil (to make it simple for my heirs); slow going because of liquidity issues. Difficult to sell a few hundred thousand $ worth in almost any local stock without seriously dropping the share price. I am currently at around 30%. What I learnt:

The smaller the market, the less efficient it is. With very careful study it is easy to identify bargain stocks and these can remain bargains for years. Think of Buffett's investing in the 1930s and 40s. As such markets grow, so does market efficiency. My local portfolio of less than 10 stocks currently pays 5.3% dividend yield (currency is tied to the USD) and my see-through P/E is under 11. You can see why I am torn between divesting and not divesting. Only real risk factor is political with the entire government disintegrating; think Kuwait just before the first Gulf war. I kept my allocation at 50% for decades by constantly exporting gains to worldwide markets. I never had to import funds from worldwide. The only way you can make serious money is by having the courage of your convictions and betting big on a handful of stocks. I do not see how one can make much money in these inefficient markets by using ETFs. You can also make a lot of $ in major markets by betting on single stocks, but that's more like gambling, because of market efficiency. Huge difference!
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unclescrooge
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Re: Anyone else in frontier markets?

Post by unclescrooge »

AlohaJoe wrote: Mon Dec 31, 2018 9:29 pm
unclescrooge wrote: Mon Dec 31, 2018 9:24 pm My play money is in tencent.

It is 0.5% of my retirement account.
That's not a frontier market, though.
Yes, I realize I didn't address the main question. :mrgreen:
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Re: Anyone else in frontier markets?

Post by pokebowl »

I looked into frontier markets some years ago. I came to the conclusion its the one area I do not want passive indexing. ETFs such as FM are heavily concentrated into one or two companies or sectors of their target countries and not truly capturing the market they purport to represent (The markets are too small). In addition the active offerings that hold a tad more in their portfolios have asinine fees upward in the 3-5% territory for returns that tend to mirror emerging markets or trail them. To truly dip into those markets you need to give up liquidity, and in doing so, after fees and other barriers, you end up with a glorified EM fund.

Not for me thanks. Just because there is an ETF for it doesnt mean its a good hold or diversifier to a portfolio.
3funder
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Re: Anyone else in frontier markets?

Post by 3funder »

Nope; emerging is risky enough, as plenty of those countries won't actually "emerge" in my lifetime.
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Re: Anyone else in frontier markets?

Post by sperry8 »

I've been waiting to get in for years. My trigger will be when the USD stops rising. That may happen later in 2019 or 2020. The USD swings between strength and weakness every 5-7 years. We're coming near that period soon.
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Re: Anyone else in frontier markets?

Post by nisiprius »

ljb wrote: Mon Dec 31, 2018 10:02 pm Nisiprius, thanks for responding, because you are one of my favorite and most respected contributors here.

As I said, I only put *half* of my 4% play allocation in FM, or just 2%. I don't think I will reveal what I put the other 2% in 😉.

Thanks for the dollar figures on the market cap of frontier markets being only 0.23%. I have read other figures higher -- Investopedia lists it as 2% - but your data from MSCI is more credible. I had been thinking that about 1% of the world's investible assets we're in frontier markets, so allocating 2% of my portfolio was a 100% overweight, but that's probably not so accurate.

Lisa
Now you've made me feel I'd better go and check, but this paper from FTSE, FTSE Frontier Markets Overview, shows this data, dated 2015:
Image

So, $0.12192 / ($37.33 + $3.61 + 0.12192) = 0.30% of international, hence, very roughly, 0.15% of global cap.

I wonder what Investopedia is referring to? It is possible that they are counting stocks that are not included in the index because FTSE does not consider them to be investible.

I found the Investopedia article that says "2%," The Difference between Emerging and Frontier Markets but the author, one Mark P. Cussen, don't give a source. I use Investopedia but I don't regard it as terribly reliable. Despite the name, unlike Wikipedia it is not a wiki, and there is no opportunity for outsiders to correct mistakes--you are relying solely on the authority of the author, if a name is given.
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Re: Anyone else in frontier markets?

Post by samsdad »

I’m not sure why the arguments that are routinely trotted out for investing in developed international/EM aren’t just as applicable here, e.g. diversification, currency hedging, holding the market’s weight, etc.

Indeed, despite its higher ER, the FM iShares fund has beaten VEU since its 2012 inception with nearly identical Sharpe and Sortino ratios but much, much less correlation to VTI.
https://www.portfoliovisualizer.com/bac ... ion3_3=100

I don’t see how one can advocate investing in EM/developed and not in FM and be logically consistent.

As an aside, I am curious as to how some random Netherlands security got lumped into the FM iShares fund. See page 11 of the Annual Report.
https://www.ishares.com/us/literature/a ... -08-31.pdf
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Re: Anyone else in frontier markets?

Post by z3r0c00l »

I avoid it because of the histories of many of these countries including hyper-inflation, default, war, political instability, and so on, but especially the corruption. Forget ER, how much money is being left behind due to bribes and other corruption?
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Re: Anyone else in frontier markets?

Post by samsdad »

z3r0c00l wrote: Tue Jan 01, 2019 11:51 am I avoid it because of the histories of many of these countries including hyper-inflation, default, war, political instability, and so on, but especially the corruption. Forget ER, how much money is being left behind due to bribes and other corruption?
I’ve been told that all of this is priced-in already. Are you saying that it’s not?
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Re: Anyone else in frontier markets?

Post by Valuethinker »

samsdad wrote: Tue Jan 01, 2019 11:47 am I’m not sure why the arguments that are routinely trotted out for investing in developed international/EM aren’t just as applicable here, e.g. diversification, currency hedging, holding the market’s weight, etc.

Indeed, despite its higher ER, the FM iShares fund has beaten VEU since its 2012 inception with nearly identical Sharpe and Sortino ratios but much, much less correlation to VTI.
https://www.portfoliovisualizer.com/bac ... ion3_3=100

I don’t see how one can advocate investing in EM/developed and not in FM and be logically consistent.

As an aside, I am curious as to how some random Netherlands security got lumped into the FM iShares fund. See page 11 of the Annual Report.
https://www.ishares.com/us/literature/a ... -08-31.pdf
Digi Communications NV?

I'd have to look it up, but its main operations are probably in a Frontier Market.

Location of listing is not a firm guide to location of operations.
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Re: Anyone else in frontier markets?

Post by z3r0c00l »

samsdad wrote: Tue Jan 01, 2019 2:57 pm
z3r0c00l wrote: Tue Jan 01, 2019 11:51 am I avoid it because of the histories of many of these countries including hyper-inflation, default, war, political instability, and so on, but especially the corruption. Forget ER, how much money is being left behind due to bribes and other corruption?
I’ve been told that all of this is priced-in already. Are you saying that it’s not?
I don't think those markets are efficient or transparent enough to know what the real price is or should be. So I don't invest in OTC penny stocks either.
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Re: Anyone else in frontier markets?

Post by HomerJ »

samsdad wrote: Tue Jan 01, 2019 2:57 pm
z3r0c00l wrote: Tue Jan 01, 2019 11:51 am I avoid it because of the histories of many of these countries including hyper-inflation, default, war, political instability, and so on, but especially the corruption. Forget ER, how much money is being left behind due to bribes and other corruption?
I’ve been told that all of this is priced-in already. Are you saying that it’s not?
Who told you that?

As far as I can tell, many people treat Emerging Markets PE ratios like they are equivalent to the U.S. without pricing in corruption, wars, dictatorships, possible nationalization of companies, etc.

All they seem to see is a PE of 6 and assume that one is sure to go gang-busters, since PE of 6 worked out well here in the developed world for investors.
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am
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Re: Anyone else in frontier markets?

Post by am »

I remember previous discussions of investing in frontiers led to the conclusion not to. Why make the portfolio more complex, and expensive?
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Re: Anyone else in frontier markets?

Post by nisiprius »

samsdad wrote: Tue Jan 01, 2019 11:47 am I’m not sure why the arguments that are routinely trotted out for investing in developed international/EM aren’t just as applicable here, e.g. diversification, currency hedging, holding the market’s weight, etc.
I think "holding the market's weight" is reasonable, and, as I noted above, the market weight of frontier markets is essentially zero. (For my own reasons, good or bad, yes, I choose to overweight US and underweight ex-US but let's not get into that).

The Vanguard Total World Stock Index Fund is supposed to hold according to market weight, and it tracks the FTSE Global All-Cap Index. FTSE says
The FTSE Global All Cap Index is a market-capitalisation weighted index representing the performance of the large, mid and small cap stocks globally.
It then goes on to say that its 8,000 stocks "cover Developed and Emerging Markets," so it apparently does not include frontier markets. (Actually it does include Kuwait, but never mind). So, let's compare the results of two approximations to a total world stock index. Portfolio 1, blue, is an attempt at a true holding, including frontier markets: 99.77% VTWSX, 0.23% FM. Portfolio, red, is 100% VTWSX.

Source
Image

So my answer to "why not include frontier markets?" is "because it adds complexity for no good reason, since it doesn't make a darned bit of difference."

Next question: why doesn't the FTSE Global All-Cap Index include frontier markets? The answer seems to be that by definition, according to FTSE's Global Equity Index Ground Rules
In order for a country to be classified as Developed, Advanced Emerging or Secondary Emerging, it must meet the required criteria for those categories as set out in the FTSE Quality of Markets matrix and also have a minimum of three securities which meet the FTSE Global Equity Index Series eligibility thresholds.
and by definition, "frontier" market means a market that does not meet the criteria for index inclusion. (Stocks also need to meet "investability" requirements).

FTSE is not excluding them countries on the basis of the size of the countries market, or its GDP, or xenophobia, or anything like that, it's excluding them on the basis of "market quality" and "investability." There are all kinds of stocks--penny stocks, for example--that are stocks, but aren't in the indexes or the index funds, so I don't invest in them. I think it's also reasonable not to invest in stocks that are not in a "global all-cap" index, either.

It's not a question of avoiding frontier markets. I happen to use VGTSX and it happens to include stocks from Kuwait. I'm not going to get bent out of shape, or search for some other fund. I'm just saying that I'm happy with some reasonable total international or total world fund, and at the point when today's "frontier markets" become "secondary emerging markets" they'll automatically enter the index, Vanguard will automatically by them, and I'll automatically hold them.
Last edited by nisiprius on Tue Jan 01, 2019 5:54 pm, edited 1 time in total.
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Re: Anyone else in frontier markets?

Post by selters »

I purchased a few shares of FM in 2014 that I still own. I'm not terribly excited about owning them based on five years of performance, but I don't sell an investment based on five years of performance oŕ how I feel about it. Frontier Markets are part of the global investable stock market, so I own some Frontier Markets.
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Re: Anyone else in frontier markets?

Post by qwertyjazz »

nisiprius wrote: Mon Dec 31, 2018 8:33 pm The total market capitalization of the MSCI Frontier Markets Index) is $0.112 trillion.

The total market capitalization of the FTSE Global All-Cap Index is $49 trillion.

Just to be clear, we are talking about putting 4% 2% of a portfolio into 0.23% of the world's stocks.

Frontier markets. Tall tales and true from the legendary markets.

And the question I have is this: would ljb be doing the same thing if there were something called "fantasy markets" (the happiest markets of them all?)

Image
Fantasy market cap is 162 billion
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am
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Re: Anyone else in frontier markets?

Post by am »

I wonder if there is going to be a corruption, govt. manipulation, lack of transparency factor added to the usual small value, Momentum etc as it applies to the frontier markets :D ?
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Re: Anyone else in frontier markets?

Post by sunnywindy »

I owned about $100 of iShares FM in my play Motif account about 5 years ago. One thing to consider (if you hold a substantial amount of FM) is that every few years countries migrate from the FM index to the EM index and when this happens, the fund managers have to sell all stocks in that country. This, unfortunately, sets off huge capital gains that you are going to have to pay. And, even with the tax-efficient ETF structure and iShares competence, they could not manage around these gains.

So, I suspect when Argentina eventually returns to the EM index, the same cap-gains situation will repeat itself.
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