Tuesday, Nov 27, 2007


 
   By Claudia Assis 
   Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Equities from "frontier" markets in far-flung developing countries are set to become next year's darlings in emerging-market investing.

At a time when emerging-markets exposure is almost commonplace for large or advanced developing countries such as India or South Korea, savvy investors are now looking elsewhere to reap the rewards of an early entry into the up-and-coming places within the asset class.

Moreover, with U.S. credit-market woes casting a pall on U.S. and global economic growth, the hunt is on for countries thought to be less vulnerable to a worldwide slowdown.

HSBC Holdings PLC (HBC) is rolling out a frontier-market fund in January, Christian Deseglise, HSBC's global head of emerging markets, told Dow Jones Newswires Tuesday.

The new fund will look at companies in some 60 countries, he said. The target is to raise about $500 million for the fund, which will not be available in the U.S., Deseglise said.

HSBC holds more than $80 billion in emerging-market assets. The fund would include "cross-over" countries such as Colombia, Pakistan and Peru, which are already in index provider MSCI Barra's index covering emerging markets.

MSCI Barra, for its turn, announced Tuesday the Friday launch of a new frontier market index, including 19 countries such as Bahrain, Bulgaria, Croatia, Kazakhstan, Kenya, Nigeria, Sri Lanka, the United Arab Emirates and Vietnam.

"Our decision to launch the MSCI Frontier Markets Indices reflects the growing interest from international investors in these equity markets, as they look beyond existing developed and emerging markets in their search for new investment opportunities," MSCI Chairman and Chief Executive Henry Fernandez said in a press release.

Other key index providers are taking note of the rising interest in frontier markets, generally understood to be the less liquid, smaller "emerging" emerging markets.

"I get calls every day about these countries," Alka Banerjee, vice president of Standard & Poor's Index Services, the group that oversees S&P's frontier index, told Dow Jones Newswires. She said S&P intends to take its broader frontier-market index to daily from monthly as soon as next year to tend to that demand for a more revealing benchmark.

"The issue for us is, of course, data," Banerjee said. The agency had reliable information on the 30 companies included in a subset index launched in October, the S&P Select Frontier Index. But it's less sure about the data reliability for the more than 270 companies in the broader S&P/IFC Global Frontier Markets, which as of Tuesday was up 28% year-to-date. It posted gains of 36% last year.

The Select index was up 9% on year, compared with losses of 6% in 2006.

If benchmark indexes are about to get easier to come by, it's slim pickings among available funds, although major banks are expected to follow HSBC's lead and launch frontier-market funds sometime next year.

A few emerging-market funds, such as Templeton's Emerging-Market Small Cap fund, behave like frontier funds, tending "to look pretty far afield," said Brad Durham, managing director at Boston-based fund tracker EPFR Global. But they are few and far between, with the lack of a reliable benchmark one of the reasons for the dearth, he said.

"It's a compelling idea," and it could take off much in the way that funds dedicated to the so-called BRIC countries - Brazil, Russia, India and China - started to become popular a couple of years ago, he added. "I don't think it's a fad. There are a lot of pre-emerging markets that look very promising."

U.K.-based Slim Feriani manages one of the few funds dedicated to frontier markets, the Advance Frontier Markets. The closed-end mutual fund, launched in June, has $87 million under management, up slightly from $85 million at inception. Nearly half of its portfolio is dedicated to Middle Eastern and North African companies, with Sub-Saharan African firms another 10%.

But no country exposure is greater than 10%. Frontier markets are a big group of countries and "we want to have as much diversification as possible," Feriani told Dow Jones Newswires. The fund's mandate is no country allocation greater than 15%. "We just started ... we want to be a little bit more cautions," he said.

The fund is based on the prediction that frontier markets such as Egypt and Vietnam will become "mainstream" emerging markets in five years, he said. "The frontier concept for us is all about the fact they will be the emerging markets of the future."

Investors are particularly interested in the independence of those markets from the U.S. and even developed markets generally. The fund invests in nearly 40 countries, and what happens in the developed world may matter very little in Nigeria or in Bangladesh, the thinking goes.

Investors are mainly concerned about political risk in these countries, Feriani said. Recently, Advance cut its exposure to Pakistani equities in half given the roiling political situation there, he said.

-By Claudia Assis, Dow Jones Newswires; 201-938-4385; claudia.assis@dowjones.com

(END) Dow Jones Newswires

November 27, 2007 18:20 ET (23:20 GMT)