September 08, 2021
In Canada and other developed markets, equity diversification has changed significantly in recent years. Traditional investments are now less diversified due to the increasing integration of global supply chains and global markets' interconnectedness.
The importance of diversification, however, has not changed. If anything, it is more important than ever. With declining interest rates and record-low bond yields, investors are on a quest for income and better returns. Many investors have increased their exposure to developed or emerging-market equity investments. However, they have experienced consequences when markets have tumbled in unison, such as during the early days of the COVID-19 pandemic.
Some investment managers now offer opportunities to invest in geographically unique markets. In particular, frontier markets are presented as a major opportunity for investors who have the flexibility to make long-term investments.
What are frontier markets?
Frontier markets are an alternative asset class focused on identifying opportunities in economies that are still in their infancy in terms of development. These "frontier" markets are less developed than emerging markets like China or Brazil.
Unlike emerging markets, there is no clear and standard definition of frontier markets. We consider frontier markets to be unclassified markets or markets that are not represented well in the emerging markets index, such as Indonesia, the Philippines, Vietnam, Ghana, and Kenya. These have large and growing populations and low but increasing income levels.
As incomes rise, these countries' populations are expected to increase consumer spending on goods and services. It should increase the profitability and business maturity of local companies able to meet rising consumer demand – making such companies ripe for investment.
Understanding the risks and benefits of frontier investing
While many of these countries are high-risk due to their low level of economic maturity and potential political instability, their economies are highly localized and disconnected from global trends, making them a viable mechanism for diversifying portfolios. To mitigate risk, the companies we invest in are typically consumer-focused – with offerings that meet local consumption demand rather than global supply needs.
Investing in frontier markets can also generate social benefits, injecting much-needed capital into underinvested companies and helping drive regional economic development and the maturation of key industries. Investors can make their money do good in the world while also contributing to their long-term financial goals.
How do frontier market investments fit within an investor’s financial portfolio?
At CC&L Private Capital, we believe that adding a modest allocation to frontier markets can help improve the robustness of a portfolio under certain circumstances. However, any frontier investments need to be made based on a fulsome discussion of the risk and return trade-offs.
Find out more
For more information on different types of alternative asset classes and innovative investment approaches, read our Portfolio Guide: Beyond Stocks and Bonds.
If you would like to find out more about our approach to frontier investing or learn how we can help you grow your investment returns, please contact us.