Patience Required for Frontier Markets Opportunities

"I get more excited every time I visit frontier-market countries," said Laura Geritz, lead manager of Wasatch Frontier Emerging Small Countries WAFMX. That sentiment was shared by her fellow panelists at the 2015 Morningstar Investment Conference: Pradipta Chakrabortty, who oversees

In explaining their enthusiasm, the managers noted several features of frontier markets. The countries' populations are big and skewed toward the youthful end of the spectrum. That translates into significant opportunities for companies that are able to tap into consumption growth, such as a cookie-maker in Bangladesh held by Chakrabortty.

A number of these countries also stand to benefit from their proximity to China, which is trying to re-establish the Silk Road trading network. The relative scarcity of foreign direct investment means that capital is deployed with particular care. Meanwhile, the lack of competition lends itself to monopolies or oligopolies within many market segments, leading in turn to high returns on capital.

Some risks are overstated, the panelists agreed. Western media tends to present a rather one-sided view of countries such as Pakistan, one of Ishida's favorite places to invest. Its political system may be unstable, but the top managers of Pakistani companies, many of whom have trained at elite universities, have learned to thrive in that environment. Times of political turmoil can thus be seized upon by skilled managers to buy shares of great companies at bargain prices.

Other risks are real, and bear monitoring. Managers must be able to distinguish between countries in which political instability presents an opportunity, and places such as Argentina or Zimbabwe, where political problems appear intractable.

Unexpected events can have an outsized impact on these fledging economies. Liquidity issues loom especially large. Well-capitalized firms with competitive advantages are hard to come by. Shareholders in these firms tend to hold on to them. That makes it difficult for new participants to enter frontier markets. The lack of regular trading volume can also make it difficult to exit these positions in normal conditions, to say nothing of crises.

In the end, those who hope to benefit from frontier-markets investing must have an appetite for risk and a long time horizon.