(PUB) Investing 2015

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9 Morningstar FundInvestor February 2015
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 ADRs for U.S. dollars.
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 for a full list
of frontier-markets funds.
35
30
25
20
15
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Frontier Markets Indexes Have Lower Volatility Than Emerging Market Indexes
p MSCI Frontier pMSCI EM p MSCI EAFE
Standard Deviation (%)
Source: Morningstar Direct. Data as of Dec. 14, 2014.