(PUB) Investing 2015

February 2 015

Morningstar FundInvestor

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Frontier Markets Indexes Have Lower Volatility Than Emerging Market Indexes p MSCI Frontier p MSCI EM p MSCI EAFE

Kenya, on the other hand, has been a legitimate success story. Kenya is the largest economy in East Africa. Relative to its neighbors, it has a better- educated population, its economy is more diversified, and it has stronger trade and financial links to the rest of the world. During the past few years, foreign direct investment has been rising, as many multi- nationals have sought to establish their East Africa hub in Kenya. Many of Kenya’s large-cap public companies are well-run firms with exposure to solid growth trends. Investment Options There are currently 15 U.S.-listed diversified frontier- markets funds and 14 funds that target specific regions within the frontier markets. Overall, frontier- markets funds have short track records—out of the 29 funds, only seven were in operation during 2008 global financial crisis. And as evidence of the limited liquidity in frontier markets, three funds shuttered to new investors when they each hit about $1 billion in assets under management. Below we highlight two options. Harding Loevner Frontier Emerging Markets HLFMX launched in May 2008 , and its lead portfolio managers are Pradipta Chakrabortty and Rusty Johnson. Johnson also comanages Harding Loevner Emerging Markets HLEMX , which carries a Morningstar Analyst Rating of Silver. Stocks from frontier markets typically account for 70% to 80% of the portfolio, with the remaining 20% to 30% in companies from smaller emerging markets. Matthews Emerging Asia MEASX invests in both emerging Asia ( 60% of the portfolio) and frontier Asia ( 40% ). Taizo Ishida has been the lead manager since the fund’s inception in 2013 , and he also manages Matthews Asia Growth MPACX and Matthews Japan MJFOX , both of which have exhib- ited good risk-adjusted returns relative to their respective category peers during the last decade. Both Harding Loevner and Matthews carry Positive Morningstar Parent ratings. œ Contact Patricia Oey at patricia.oey@morningstar.com for a full list of frontier-markets funds.

Standard Deviation (%)

35

30

25

20

15

10

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Morningstar Direct. Data as of Dec. 14, 2014.

Markets Index’s 16% return during the same time period.

One of the key drivers of performance in UAE ’s equity markets was MSCI ’s announcement in June 2013 that it was going to move UAE (as well as Qatar) from the MSCI Frontier Markets Index to the MSCI Emerging Markets Index in June 2014 . That change in classification to an “emerging market” means there is now a significantly larger potential investor base for these countries’ securities. In the months follow- ing the 2013 announcement, investors piled into Qatari and UAE stocks in an attempt to get ahead of this reclassification. Heavy flows into these small capital markets—each of which has about 20 liquid stocks—fueled a strong rally. The performance of Argentina may be surprising given the country’s recent debt crisis, double-digit inflation, and weakening currency. One explanation is that local investors have been buying shares as a hedge against inflation. Another possibility is that invest- ors are optimistic that a new leader will implement much-needed reforms that will stabilize Argentina’s economy. (The current president, Cristina Fernández de Kirchner, will reach her term limit in 2015 .) But another potential reason Argentines have been buying equi- ties is because it is reportedly one of the few channels by which they can gain access to the U.S. dollar when Argentina implements limits on U.S. dollar purchases. Many large-cap Argentine companies have both a local listing as well as an ADR that trades on the New York Stock Exchange, so Argentine investors can buy local shares and then sell ADR s for U.S. dollars.