WASHINGTON - Merrill Lynch took action last week to feed growing investor appetite for frontier markets. These are "Emerging, emerging markets," said Michael Hartnett, Merrill Lynch's chief strategist for emerging markets.
Merrill Lynch's Frontier Index is an index of 50 stocks in 17 countries in Europe, Africa, Asia and the Middle East. It's different from an index recently introduced by MSCI Barra that operates only as a tracking tool. The Merrill Lynch version was devised as an instrument that investors can buy and sell like a stock or fund.
For now, only institutions such as corporations, mutual funds and hedge funds can buy the index. Individuals can invest in frontier markets such as the United Arab Emirates, Kuwait, Nigeria and Morocco through mutual funds. According to Morningstar, the diversified funds that have the largest exposure to Africa and the Middle East are T. Rowe Price Africa & Middle East (TRAMX, 95 percent), Lazard Emerging Markets (LZEMX, 21 percent), T. Rowe Price Emerging Europe and Mediterranean (TREMX, 20 percent), and Eaton Vance Tax-Managed Emerging Markets (EITEX, 19 percent).
The frontier markets are young and thinly traded, and have weak regulation and low levels of foreign ownership.
All that adds up to high risk, but also the potential for strong gains.
Since Sept. 30, the frontier markets have gained 31 percent, compared with an 8 percent loss for the developed markets and a flat performance for traditional emerging markets.
The attraction of these underdeveloped markets is that they tend not to get caught up in the turbulence that sweeps through major markets.
Hartnett said the Merrill Lynch index favors the largest and most liquid stocks in the frontier countries.
Among the biggest components of the index are Emaar Properties in the UAE, Oil & Gas Development in Pakistan and the Bank of Cyprus.