The Diversity Of Frontier Market Economies May Help Dampen Some Key Risk Factors, Finds New Forward Analysis Study concludes that a broadly diversified approach is critical for risk management
SAN FRANCISCO, March 4, 2014 /PRNewswire/ -- After a year when frontier markets boasted some of the world's best-performing stocks, investors may find it worth their while to assess the risks of investing in these fast-growing economies, concludes a new analysis by Forward (Forward Management, LLC) titled Frontier Markets: Weighing the Risks.
While emerging market indices declined in 2013, the MSCI Frontier Markets Index gained 26.32% during the year and 9 out of 26 nations in the index experienced returns greater than 25%.
"There's no doubt that frontier markets present substantial risks as well as growth opportunities. For one thing, they lack the level of political stability and the financial and legal infrastructure we take for granted in more developed markets," said Alan Reid, Forward CEO. "But those who delve into these markets may find their risk profile is less daunting than is widely assumed. For example, investors may be surprised to learn that frontier markets as a group are now more fiscally stable than developed markets."
Another factor investors may not be taking into account, the study suggests, is the diversity of frontier markets, which span five continents and have little in common other than being in the early stages of economic development. As a result, while frontier markets individually have been quite volatile, between 2010 and the end of 2013 the MSCI Frontier Markets Index was generally less volatile than either the MSCI Emerging Markets Index or the S&P 500 Index.
"Frontier economies are so far-flung and differ so greatly that their markets are unusually uncorrelated to each other. Economic or political developments in Nigeria or Argentina will likely have little or no effect on Estonia or Kazakhstan," said Nathan Rowader, Forward's director of investments and author of the study. "At the same time, many of these economies are dominated by consumer-serving sectors like banking, telecom or retailing, so they may be more affected by the local economy than by global macro trends."
The study concludes that investors may be able to dampen the risks of investing in individual frontier economies by employing a strategy that invests across a broad cross section of markets. Rowader noted that in some cases, adding frontier market exposure to a portfolio may actually lower its overall risks, given the historically low correlation between frontier market, emerging market and developed market indices.
"In essence, frontier markets are the emerging markets of tomorrow," commented Reid. "In our view, they represent an opportunity that's well worth exploring if you're an investor seeking growth, global diversification or both."
Forward was among the first mutual fund companies to develop a frontier market strategy. At the end of 2008 it introduced Forward Frontier Strategy Fund, which invests in a basket of securities that generally approximate the MSCI Frontier Markets Index. Since then the number of frontier-focused mutual funds available has grown from 4 to 8, according to Morningstar.
The world has changed, leading investors to seek new strategies that better fit an evolving global climate. Forward's investment solutions are built around the outcomes we believe investors need to be pursuing – non-correlated return, investment income, global exposure and diversification. With a propensity for unbounded thinking, we focus especially on developing innovative alternative strategies that may help investors build all-weather portfolios. An independent, privately held firm founded in 1998, Forward (Forward Management, LLC) is the advisor to the Forward Funds. As of December 31, 2013, we manage more than $5.2 billion in a diverse product set offered to individual investors, financial advisors and institutions.
You should consider the investment objectives, risks, charges and expenses of the Forward Funds carefully before investing. A prospectus with this and other information may be obtained by calling (800) 999-6809 or by downloading one from www.forwardinvesting.com. It should be read carefully before investing.
Forward Frontier Strategy Fund seeks capital growth.
Correlation is a statistical measure of how two securities move in relation to each other.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of frontier markets.
S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.
One cannot invest directly in an index.
There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will fluctuate and you may have a gain or loss when you redeem shares.
Derivative instruments involve risks different from those associated with investing directly in securities and may cause, among other things, increased volatility and transaction costs or a fund to lose more than the amount invested.
Foreign securities, especially emerging or frontier markets, will involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation.
Investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio.
Diversification does not assure profit or protect against risk.
Alan Reid is a registered representative of Forward Securities, LLC.
Nathan Rowader is a registered representative of ALPS Distributors, Inc.
Forward Funds are distributed by Forward Securities, LLC.
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