Buying a Frontier Market Fund? This Theater’s Got a Teeny, Tiny Exit

September 4, 2013 Leave a comment

September 3, 2013, 10:26 A.M. ET

Buying a Frontier Market Fund? This Theater’s Got a Teeny, Tiny Exit

By Brendan Conway

It’s been a rotten year for one of yesteryear’s favorite investing categories: iShares MSCI Emerging Markets ETF (EEM) is down 13% on the year. But iShares MSCI Frontier 100 ETF(FM), which tracks stocks from tiny, less trodden markets that are too underdeveloped for EEM, is up more than 10%. If you guessed frontier markets are even less liquid than emerging markets and, thus, harder to exit in a panic, Joe Light of the Wall Street Journal has some data you should see. Namely, Vanguard Group estimates the one hour it takes to liquidate $100 million in emerging-markets expands to more than 10 days when you’re on the frontier. Being so small can have bad consequences, says Chris Philips, senior analyst at Vanguard Group, which doesn’t offer a frontier-market fund. For one thing, it can take funds a long time to move into and out of stocks. Mr. Philips calculated that a frontier-market fund would need more than 10 days to liquidate a $100 million position.In contrast, a position of that size in emerging markets would only take an hour to dispose of, he says.

Such illiquidity also means that it costs more for fund managers to trade stocks. There tend to be wider differences between share asking and selling prices, and large purchases or sales can unintentionally move a stock price up or down, says Luke Richdale, a client portfolio manager at J.P. Morgan Asset Management.

Another risk: In the past, some frontier-market countries such as Argentinahave nationalized companies or even entire industries, taking control away from shareholders and wiping out some or all of the companies’ value.

It’s not as if every frontier-market fund is having a banner year, either. Guggenheim Frontier Markets (FRN) entered Tuesday’s session down 21% on the year, weighed down by stocks that aren’t part of the iShares ETF. They include Colombia’s Ecopetrol (EC), down 20%, and Peru’sBuenaventura Mining Company (BVN), off 64%.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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