Lazard

Perspectives

Deciphering
the Frontier
Opportunity
Frontier markets represent a subset of the
global emerging markets opportunity, but
what exactly comprises this opportunity
set? As suggested by the name, frontier
includes countries with local economies and/
or capital markets that are in a nascent stage
of development. On average, their listed
companies are fewer in number, smaller,
and less liquid than those found in core
emerging markets such as China, India, or
Mexico. However, the number of potential
investable countries and companies
including those not represented in the MSCI
Frontier Markets Indexis significant and
is precisely why frontier markets appeal to
skilled and experienced investors. We believe
it is essential to have an extensive network
of contacts and specialized knowledge about
local dynamics in order to take advantage of
these opportunities.

There are three distinct components to the frontier opportunity set.

The largest subset consists of developing economies, characterized by
low levels of consumption and GDP per capita, less developed infrastructure, and poorer social metrics such as literacy, infant mortality,
and life expectancy. Some of these countries have larger populations
and GDP (Bangladesh, Pakistan, and Nigeria), and others are smaller
(Bulgaria and Sri Lanka). The second is a group of countries in the
Persian Gulf.1 These nations petroleum-fueled economic development has prompted debate about their frontier market qualification,
while their historical lack of economic diversity has suppressed capital
market development and kept them in the frontier world. The third is
a group of countries with unique characteristics, such as Saudi Arabia
and Iran, where limited access for foreign investors, rather than a lack
of capital market development, is keeping these markets from inclusion in the MSCI Frontier Markets Index.
There are approximately 200 countries in the world.2 The MSCI
World Index comprises equities from 23 developed markets countries,
and the MSCI Emerging Markets Index includes equities from 23
emerging markets countries. If we define the frontier opportunity
as any remaining country, this would represent a group of over 150
countries. Excluding the roughly 40 countries that do not have stock
exchanges, despite their large populations (Ethiopia) or significant
GDP (Brunei), there would still be around 100 countries in this
broadest definition of frontier markets.
Broad market indices seem to struggle to fully encompass the frontier
investment opportunity set. The MSCI Frontier Markets Index has
23 country constituents, whereas the S&P Frontier BMI Index and
the FTSE Frontier Index include 35 and 21 countries, respectively
(Exhibit 1). The MSCI Frontier Markets Index has a 22.1% weight in
Kuwait, which is 17.2% of the S&P Frontier BMI Index and is not a
part of the FTSE Frontier Index. Currently, Saudi Arabia, which has
a large and liquid domestic equity market, is not represented in any of
the three indices.
Therefore, the actual investment opportunity set is much broader and
potentially more difficult to identify and define than with developed
markets equities and even core emerging markets. Although frontier
markets can pose logistical challenges for prospective investors, the
potential reward for surmounting these challenges is substantial.

The Track Record

From 2000 to 2008, emerging markets outperformed developed
markets. China was ascendant, and many parts of the emerging world
benefited from a commodities boom, considerable global liquidity,
and a benign inflation outlook. The confluence of these factors allowed
consumption to increase and governments to run balanced budgets,
which led to improved credit ratings, lower costs of capital, and stable
currencies. In particular, the equity markets of the BRIC countries
(Brazil, Russia, India, and China) enjoyed exceptional returns from
2003 to 2007. Over this period, the annualized returns for the MSCI
China and Brazil indices were 47.4% and 64.1%, respectively, versus
17.0% for the MSCI World Index.
However, the market environment has changed since the global financial crisis with emerging markets, particularly the previously high-flying
BRICs, underperforming. In 2008, the MSCI World Index declined
40.7%, but the MSCI Russia Index lost 73.9%, and the MSCI India

Exhibit 1
Defining the Frontier Market Opportunity is Complex
Country Weighting of Various Frontier Market Indices
MSCI
MSCI
Emerging
Frontier
Markets (%) Markets (%)

Argentina
Bahrain
Bangladesh
Botswana
Brazil
Bulgaria
Chile
China
Colombia
Cote dIvoire
Croatia
Cyprus
Czech Republic
Ecuador
Egypt
Estonia
Ghana
Greece
Hungary
India
Indonesia
Jamaica
Jordan
Kazakhstan
Kenya
Kuwait
Latvia
Lebanon
Lithuania
Malaysia
Mauritius
Mexico
Morocco
Namibia
Nigeria
Oman
Pakistan
Panama
Peru
Philippines
Poland
Qatar
Romania
Russia
Serbia
Slovakia
Slovenia
South Africa
South Korea
Sri Lanka
Taiwan
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Arab Emirates
Vietnam
Zambia

6.1

1.3
23.4
0.6

0.2

0.2

0.3
0.3
8.9
2.1

3.1

4.8

0.4
1.5
1.6
1.1

3.8

7.8
15.5

12.5
2.3

1.4

0.8

S&P
Frontier
BMI (%)

FTSE
Frontier (%)

12.3
2.8
4.1
0.9

0.3

1.1
1.7
0.2

0.5

0.3
0.4

0.5
3.9
1.7
3.6
17.2
0.1
2.5
0.2

1.7

4.4
0.4
11.1
3.7
7.4
2.7

3.0

0.1
1.6

2.5

1.7
0.8

0.6

3.6
0.2

7.9
0.6

0.1

0.7
0.1

0.5
0.0

1.3

5.5

0.1

1.5

5.0

16.3
5.1

38.9
3.4

0.1

1.7

2.5

1.1

7.6

9.2
1.2
2.6

0.1

1.4

0.5

0.8
1.8
5.4
22.1

3.6
0.2

1.2

7.1

15.6
5.6
8.9

3.6

0.2

2.3

1.9

0.7

3.9

Country uniquely classified as frontier in S&P Frontier BMI

Country uniquely classified as frontier in FTSE Frontier Index
As of 30 September 2015
The indices listed above are unmanaged and have no fees. It is not possible to invest
directly in an index.
Source: FTSE, MSCI, S&P

Index fell 64.6%. Although the MSCI Emerging Markets Index returns
of 78.5% for 2009, 18.9% for 2010, and 18.2% for 2012 were attractive, they were not sufficient for the index to recover its historical highs.
MSCI, the index provider, has only been tracking frontier markets
since 2007, but it used a back-testing methodology to construct a
frontier markets index that dates back to 2003.3 Based on this data,
frontier equities underperformed core emerging markets from 2003
through 2012. However, frontier markets outperformed core emerging markets in 2013 by an impressive 24 percentage points, in 2014
by a meaningful 9 percentage points, and marginally in 2015 through
September (Exhibit 2).

Frontier Markets in Context

While frontier markets share certain characteristics, few of them
are created equal. Saudi Arabias equity market capitalization is
approximately US$444.5 billion, larger than the combined market
capitalization of all the constituents in the MSCI Frontier Markets
Index and larger than the individual equity markets of Russia,
Malaysia, Mexico, and Indonesia. Saudi Arabia is home to one of the
worlds most valuable companies (the unlisted state-owned oil and gas
company, Saudi Aramco), which has an estimated value of between
US$1.7 trillion and US$7 trillion. Despite Saudi Arabias equity
market having an average daily trading volume of approximately
US$2.5 billion and over 100 companies with market capitalizations
exceeding US$1 billion, there are currently no Saudi companies in
either the MSCI Emerging Markets or Frontier Markets indices.
Saudi Arabia opened its equity markets in a limited manner for
the first time to foreign investors in June 2015. MSCI is in active
discussions with the Saudi government and regulators about inclusion. Market speculation is that if or when Saudi Arabia is added to
a broader index, it will become a constituent of the MSCI Emerging
Markets Index, bypassing the more common practice of a country
beginning first as a part of the MSCI Frontier Markets Index. With
that said, specialist managers with expertise in the region and extensive
knowledge of the Saudi market have been exploiting the opportunity
and participating in the market via intermediaries for some time.
The combination of restricted access and capital market underdevelopment has resulted in a dramatic underrepresentation of many
emerging and frontier markets in global equity benchmarks. For
example, China accounts for 15.6% of global GDP, yet has only 2.3%
weighting in the MSCI All Country World Index (ACWI).4 Foreign
investors can only invest directly in domestically listed Chinese
equities by becoming part of the Qualified Foreign Institutional
Investor (QFII) program or through the ShanghaiHong Kong
Stock Connect.5
None of the 23 countries in the MSCI Frontier Markets Index are
part of the ACWI. However, the total economic output of these 23
countries represents 4.1% of global GDP (Exhibit 3).
In frontier markets countries, the percentage of the population that
is under 40 is much higher and the percentage of the population who
live in urban centers is much lower, relative to developed markets or
core emerging markets countries (Exhibit 4). This observation has two
implications. First, there should be a secular growth opportunity for
the sectors that are impacted as frontier markets catch up to the rest of

the world. Second, the catch-up phase should provide excellent opportunities for companies to grow earnings by orders of magnitude over
a prolonged period. Examples of promising sectors include education,
home construction/furnishings, and infrastructure (roads, seaports,
airports, subway/rail, electrification, water, and sewage).
Exhibit 2
Frontier Markets Have Recently Outperformed Emerging
Markets
(%)
26
13
0
-13
-26

MSCI Emerging Markets

MSCI Frontier Markets
2010

2011

2012

2013

2014

2015 YTD

As of 30 September 2015
The performance quoted represents past performance. Past performance is not a
reliable indicator of future results. The indices listed above are unmanaged and have
no fees. It is not possible to invest directly in an index.
Source: Bloomberg, MSCI

Exhibit 3
Frontier Contributors to Global GDP are Excluded from
the ACWI
MSCI Frontier Index
Country Constituents

Argentina
Bahrain
Bangladesh
Bulgaria
Croatia
Estonia
Jordan
Kazakhstan
Kenya
Kuwait
Lebanon
Lithuania
Mauritius
Morocco
Nigeria
Oman
Pakistan
Romania
Serbia
Slovenia
Sri Lanka
Tunisia
Vietnam
Total

% of World
GDP (2015E)a

0.8
0.0
0.3
0.1
0.1
0.0
0.1
0.3
0.1
0.2
0.1
0.1
0.0
0.1
0.7
0.1
0.4
0.2
0.0
0.1
0.1
0.1
0.3
4.1

# of Stocks in MSCI Total Market Cap

(in US$ M)b
Frontier Indexb

6
3
4
2
2
2
3
3
5
8
4
2
2
9
17
9
16
5
2
3
3
2
10
122

8,013
1,033
2,290
101
1,176
415
702
1,601
4,685
19,191
3,087
137
1,081
6,207
13,531
4,838
7,729
3,114
212
1,988
1,670
634
3,415
86,849

a As of October 2015. Source: International Monetary Fund, World Economic

Outlook Database
b As of 30 September 2015. Source: Bloomberg, MSCI

Less than half of the population aged 15 and older in Vietnam and
Nigeria have bank accounts in comparison to 80% to 95% in the
United States, South Korea, and China (Exhibit 5, top chart). Rising
banking penetration is typical for developing economies. Combined
with population growth, it can generate significant expansion in both
revenues and profits for banking/capital market services providers and
create excellent opportunities for experienced investors.
Smartphone penetration is also lower in many frontier markets
countries (Exhibit 5, bottom chart). Recent increases in mobile
phone penetration have been mentioned in the press as part of
Africas leapfrogging story.6 Some African countries with large rural
populations have been able to grow telephonic communications
without having to create the infrastructure for landline wiring.
Similarly, frontier countries have grown banking penetration without
the need to invest in the roads and buildings to access a branch
network thanks to mobile phone technology. The penetration rates
demonstrate that there is considerable runway for future growth
from this dynamic.

Investment Opportunities
Much of the frontier investment opportunity comes from the provision of capital needed for achieving the catch-up growth promise.
Given the nature and structure of frontier markets, investors need to
be discriminating when identifying specific opportunities. While frontier markets equities represent a large array of countries with different
underlying characteristics, the absolute number of companies in each
country can be small.
For instance, of the 23 countries in the MSCI Frontier Markets Index,
20 have fewer than ten constituents, and 14 have fewer than five constituents in the index. There is also sector concentration, with financial
and telecommunications companies representing approximately twothirds of the total index constituents, and country concentration, with
Nigeria and Kuwait combined accounting for over 35% of the total
weight (Exhibit 6). Of the MSCI Frontier Markets Indexs 122 companies, the five largest companies (by market capitalization) represent
an index weight of almost 20% (Exhibit 7). Further, only 69 companies in the index have a minimum of US$500,000 in average daily
trading volume (ADTV). Dropping the minimum to US$100,000
ADTV expands the list to 96 stocks.
One reason why frontier markets appeal to skilled investors is that
there are plentiful opportunities beyond those found in the index.
Exhibit 8 shows the range of market capitalizations and breadth of several representative markets and the largest respective stock (by market
capitalization) that are not included in the MSCI Frontier Markets
Index. In the five markets shown, there are over 500 listed companies,
few of which are actively covered by sell-side analysts. This is where
frontier specialists who conduct on-the-ground due diligence and have
local experience and relationships can exploit information inefficiencies and extract value.
In addition, many companies from index-listed countries are excluded
from the MSCI Frontier Markets Index. For example, in Argentina
and Kazakhstan, only companies with American Depository Receipts
(ADRs) are included, which excludes a number of companies that
are traded on domestic exchanges. Adding these companies to the

Exhibit 4
Frontier Populations are Younger and Less Urban
Population between Ages 039a
(% of total population)
100
75
50
25
0

Japan

United States

China

Sri Lanka

Bangladesh

Kenya

Bangladesh

China

United States

Japan

Urban Populationb
(% of total population)
100
75
50
25
0

Sri Lanka

Kenya

Developed Market or Core Emerging Market

Frontier Market

a Source: US Census BureauInternational Data Base. Population based on 2015

estimates.
b Source: 2015 World Bank World Development Indicators based on United Nations,
World Urbanization Prospects.

Exhibit 5
Basic Services in Frontier Markets are Underpenetrated
Account at a Financial Institutiona
(% of age 15+)
100
75
50
25
0

Vietnam

Nigeria

Kenya

China

United States South Korea

Smartphone Penetrationb
(% of total population)
100
75
50
25
0

Kenya

Nigeria

Vietnam United States China

Developed Market or Core Emerging Market

South Korea

Frontier Market

a As of 15 April 2015. Source: 2014 World Bank Global Findex Database.

b Source: The Connected Consumer Survey 2014 / 2015. Consumer Barometer with
Google. (http://www.consumerbarometer.com)

Exhibit 6
The MSCI Frontier Markets Index Has Significant Sector and Country Concentration
Utilities 1.2%
Telecom Services 13.8 %

Argentina 9.2%

Consumer Discretionary 0.4%

Consumer Staples 9.0%

Kenya 5.4%

Other 26.1%

Energy 9.0%

Materials 7.5%

Kuwait 22.1%

Industrials 3.1%
Health Care 3.1%

Pakistan 8.9%
Financials 52.8%

Oman 5.6%

Morocco 7.2%

Nigeria 15.6%
As of 30 September 2015
Source: MSCI

Exhibit 7
The Five Largest Companies Represent Nearly 20% of the MSCI Frontier Markets Index
Country

Company Name

% of MSCI
Frontier Index

Market Cap
(US $M)

6M Average Daily
Trading Volume

P/B

12M Trailing
P/E

EPS Growth
(%)

Nigeria

Dangote Cement

1.2

15,393

609,372

5.0x

16.3x

22.5

Kuwait

National Bank of Kuwait (S.A.K.)

7.6

13,503

2,557,406

1.4x

14.6x

31.2

Morocco

Maroc Telecom SA

2.3

9,926

1,003,240

7.8x

17.4x

12.2

Kuwait

Kuwait Finance House K.S.C.

5.1

8,984

2,137,158

1.6x

20.9x

45.0

Morocco

Attijariwafa Bank SA

1.6

7,001

1,343,525

1.9x

15.5x

5.8

As of 30 September 2015
Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities
was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein.
Source: FactSet Estimates, FactSet Fundamentals

opportunity set expands the investable universe for frontier markets to

more than 500 stocks with a median market capitalization of US$350
million and a combined ADTV of greater than US$850 million.7
The combination of index constituents and non-index companies creates a large and often overlooked opportunity set in frontier markets.
With abundant opportunities to consider, how can investors compare,
for example, the attractiveness of an Ethiopian bank versus a Pakistani
brokerage? Having a local presence is critical to understanding and
vetting businesses based in frontier markets. In order to evaluate and
access the opportunities derived from the diverging development trajectories of frontier countries, it is necessary for investors and portfolio
managers to have an extensive network of contacts and specialized
knowledge about local dynamics.

Frontier Exposure in an Investment

Portfolio
Frontier markets may offer attractive investment opportunities
and portfolio diversification from developed and core emerging
markets risk. However, frontier access continues to be a challenge.
The three most common investment methods are: (1) passively
managed products such as exchange-traded funds (ETFs); (2)
long-only, benchmark-constrained managers; and (3) alternative,
specialized managers.

Exhibit 8
Select Non-Index Frontier Companies
Looking Beyond Market Indices Expands the Opportunity Set

Country

Total Market
# of
Capitalization Listed
(US$ M) Companies P/E

P/B

Costa Rica

2,015

Florida Ice & Farm

1,183

Saudi Arabia

444,498

174

Saudi Basic Industries

65,878

Sri Lanka

20,199

288

John Keells

1,471

Zambia

1,984

29

403

Zimbabwe

3,368

75

Delta

1,008

Lafarge Cement

12.6x 2.1x

12.3x 1.6x

14.0x 1.5x

11.1x 4.1x

11.9x 2.2x

EPS
1 Year Dividend
Growth Yield
(%)
(%)

10.2

1.4

-7.7

6.7

14.5

1.7

49.0

1.1

-11.6

4.5

As of 30 September 2015
Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in
these securities was, or will prove to be, profitable, or that the investment decisions
we make in the future will be profitable or equal to the investment performance of
securities referenced herein.
Source: Bloomberg

In recent years, there has been significant growth in the number and
size of frontier-focused ETFs and long-only products. At the end of
2014, there were fifteen US-listed frontier market funds (both actively
and passively managed) with about $5 billion in assets.8 Since frontier
markets is still a relatively young asset class, most of these funds have
relatively short track recordsten were launched during or after 2012.
One of the qualities that makes these funds appealing to investors is
that they offer daily or intra-day liquidity.
Earlier, we highlighted some of the trading volume characteristics of
frontier markets. Institutional investors that allocate sizable assets to a
more concentrated number of stocks can have a large impact on their
performance. The countries, sectors, and stocks receiving capital from
these allocations will typically experience periods of good returns, but
overcrowding can often lead to valuation distortions. When markets
undergo corrections or the environment deteriorates, the resulting
increase in volatility can be severe.
Nigeria is an excellent example of this dynamic. From late March
to early August 2014, the MSCI Nigeria Index rose 24.3%. However,
thanks to petroleum dependency and crude oils price rout, Nigeria
began a nose dive in August 2014, ending the year down 29.6%
followed by year-to-date declines (through 30 September 2015)
of 14.9%.
Nestle Foods Nigeria and Nigerian Breweries, the two largest consumer staple stocks in the MSCI Nigeria Index, are familiar to many
investors and are held by many frontier ETFs. Prior to the pullback
in Nigerian equities in late 2014, Nestle Nigeria was trading at a
valuation premium relative to its European parent. Despite being a
stock that is a direct beneficiary of the African domestic consumption theme, the consensus estimates for the companys 2015 and
2016 earnings and revenues have been continually downgraded since
September 2014. From 1 July 2014 to 13 February 2015, Nestle
Nigeria fell by over 48% in US-dollar terms.
Lazards Alternative Emerging Markets team believes that the frontier
opportunity set is better suited to an alpha approach, achieved using
a portfolio of managers with specialized experience, skills, and local
presence, such as an emerging and frontier markets-focused fund
of funds. One of the benefits of this approach is diversification of
exposures across the opportunity set. These types of strategies are characterized by value consciousness and a willingness to invest outside of
the index, which help mitigate the risk of investing in overcrowded,
expensive companies.
To stay true to their mandates, however, these specialist managers will
generally limit the assets they are willing to manage. Limited liquidity
and capacity is a reality of investing in frontier markets. Whether
using a beta approach (via an ETF, country, or index fund) or a
traditional, long-only active strategy, investors face the same liquidity
conditions. Investors should be sensitive to a potential mismatch
between the liquidity of an investment vehicle and its underlying
assets. Additionally, given the specialized nature of frontier investing,
beta exposure does not necessarily equate to low cost. According
to Morningstar, individual investor share classes for many frontier
market funds typically carry annual expense ratios of 2% or more
(institutional share class expense ratios are slightly lower), and ETFs

that track frontier markets benchmarks have annual expense ratios of

approximately 0.7%, a fairly hefty fee for passive exposure.8
For investors seeking risk reduction and alpha generation (returns
generated by manager skills rather than market directionality), who
would consider exposure to less liquid and less well-known companies,
an alternative approach using a suite of specialized managers can
offer attractive benefits. This manager universe typically aims to avoid
investing in overbought stocksor even seeks short hedges from
among them. Specialized managers are likely to be more focused on
countries and companies that are less covered by sell-side economists/
analysts and will normally have differentiated portfolios. These
managers will also carefully manage their capacity and asset base.
The combined result is an expectation of compelling returns with
substantially less volatility compared to most traditional frontier
portfolios and ETFs.
In Exhibit 9, we compare the top ten holdings of the largest frontier
markets ETF and the largest traditional, long-only frontier market
portfolio against the most representative global frontier specialist
manager currently in Lazards alternative emerging markets strategy.
We also compare each of the portfolios exposure to the MSCI
Frontier Markets Indexs top two country constituents, Kuwait
and Nigeria. The specialist manager has significantly less exposure
to the two largest constituents as well as a lower concentration in the
top ten stocks.
Relative to investing via a passive strategy or a traditional frontier
fund, our team believes that a multi-manager approach offers a more
compelling proposition. This approach would offer exposure to eight
to twelve specialist frontier managers who typically focus on less wellknown, less-expensive, and higher yielding stocks. We expect such
a portfolio to have, on average, higher earnings growth and a better
dividend yield than either ETF or traditional options. In our view,
the diversification derived from a multi-manager portfolio would also
translate into a more muted and less-volatile return profile.
When frontier markets rally, we expect a multi-manager portfolio
to participate in the upside capture but to lag benchmarks such as
the MSCI Frontier Markets Index. However, when frontier markets
experience sharp sell-offs or corrections, we anticipate this portfolio
to provide downside protection and outperform the index, leading to
better compounding of returns over the long term. Compared to passive and traditional options, an active approach should outperform on
a risk-adjusted basis across different market cycles.
Additionally, given the tendency for frontier market equities to be
more influenced by domestic events rather than global financial or
geopolitical developments, our team believes that including frontier
exposure in a global emerging markets hedge fund portfolio can
help generate alpha and mitigate risk. As we mentioned (Exhibit 2),
the MSCI Frontier Markets Index has outperformed its emerging
markets counterpart for several years. During 2013, our Lazard
Alternative Emerging Markets strategy had several managers that
gave us significant frontier markets exposure, helping our strategy to
outperform the MSCI Emerging Markets Index by 16.8% in net-of-fee
terms that year.

Exhibit 9
Active Frontier Investments Provide Diversification via Less Crowded Names and Markets
Top 10 Holdings
iShares MSCI Frontier 100 ETF

(%)

Templeton Frontier Markets Fund

(%)

Global Frontier Specialist in Lazards

Alternative Emerging Markets Strategy

(%)

National Bank of Kuwait

7.5

OMV Petrom

6.1

Mouwasat Medical Services

3.5

Kuwait Finance House

5.1

Bank Muscat

4.1

Pricesmart

3.3

Mobile Telecommunications

3.9

Mobile Telecommunications

3.8

Bupa Arabia For Cooperative

3.1

Nigerian Breweries

3.3

National Bank of Kuwait

3.8

Hoa Phat Group

2.9

YPF SA

3.2

Sonatel

3.4

Halyk Savings Bank

2.9

Maroc Telecom

2.4

Nigerian Breweries

3.3

Emaar Properties

2.8

Guaranty Trust Bank

2.4

Zenith Bank

3.2

Equity Group Holdings

2.4

Safaricom

2.0

Letshego Holdings

3.1

East Africa Breweries

2.2

Oman Telecommunications

2.0

Samba Financial Group

2.6

First Quantum Minerals

2.0

10

Bank Muscat

1.9

Banca Transilvania

2.6

United Bank

Weight of Top 10

33.5

35.9

iShares MSCI Frontier 100 ETF

(%)

Templeton Frontier Markets Fund

Total % Exposure to Kuwait

26.5

Total % Exposure to Kuwait

Total % Exposure to Nigeria

14.7

Total % Exposure to Nigeria

1.9
27.1

Global Frontier Specialist in Lazards

Alternative Emerging Markets Strategy

(%)

<10.0

Total % Exposure to Kuwait

0.2

8.1

Total % Exposure to Nigeria

4.6

(%)

As of 30 September 2015
Allocations and security selection are subject to change. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should
not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein.
Source: BlackRock, Franklin Templeton, Lazard Asset Management

Conclusion
Whether allocating to frontier markets within a broad emerging
markets portfolio or a dedicated frontier mandate, the available alpha
is significant. The number of countries and stocks in the opportunity
set is large and the potential range of size, access, and liquidity among
them is vast. Avoiding overcrowded stocks and navigating liquidity
and capacity constraints is important for any investor contemplating
frontier markets exposure. Significant local knowledge and expertise is
required for understanding the inherent complexities and identifying
and accessing the underlying opportunities.
Investors may choose not to take advantage of this expertise if liquidity or index beta is an important objective. However, these investors
should prepare for unexpected volatility and illiquidity, particularly
during periods of dislocations, as passive and benchmark-constrained
strategies in frontier markets can be strongly influenced by capital
flows. Investors who seek a more attractive risk/reward profile and
who prefer to receive an illiquidity or complexity premium, can
obtain unique exposure to the frontier opportunity set with solutions
offered by Lazard.

About the Team

Lazards Alternative Emerging Markets team has a history of utilizing its
professional network, built from years of direct emerging and frontier
markets experience. The team also leverages the firms unparalleled global
research capabilities including the resources that are dedicated to managing
US$54 billion in emerging markets mandates. The team regularly travels to
Asia, Latin America, Africa, and eastern Europe for meetings with specialist
managers, company managements, financial intermediaries, policymakers, and
government officials. Their extensive experience in conducting on-the-ground
research is crucial in identifying the most compelling frontier opportunities
and developing an understanding of how these opportunities should be
implemented within a portfolio.
For additional information or materials related to frontier markets or the
investment solutions offered by the Lazard Alternative Emerging Markets team,
please contact our product manager, Irene Chow at irene.chow@lazard.com

This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.

Notes
1 These include Kuwait, Oman, Bahrain, Qatar, and the United Arab Emirates. MSCI upgraded the latter two from the frontier to the emerging markets index in mid-2014. MSCI will also
occasionally downgrade a country from the emerging markets to the frontier index, for example, Argentina in 2009.
2 The exact number depends on the definition of country. United Nations recognizes 195 member states. Several additional states have partial recognition. In addition, dependent territories
such as Bermuda, Guam, and Hong Kong are recognized by the International Olympic Committee.
3 Source: MSCI. The MSCI Frontier Markets Index was launched on 18 December 2007. Data prior to the launch date is back-tested data (i.e., calculations of how the index might have performed over that time period had the index existed). There are frequently material differences between back-tested performance and actual results. (https://www.msci.com/resources/
factsheets/index_fact_sheet/msci-frontier-markets-index.pdf)
4 The MSCI ACWIs China constituents are all Hong Konglisted stocks. However, the underweight is not as extreme since many Chinese companies have listed ADRs in the US market (e.g.,
Alibaba).
5 Foreign investments in China are restricted due to foreign exchange control. The Qualified Foreign Institutional Investor (QFII) Scheme was introduced in 2002, allowing foreign institutional
investors who meet certain qualification to have direct access to Chinas capital market. On 17 November 2014, China implemented the ShanghaiHong Kong Stock Connect, a mutual market access program through which investors in Hong Kong can buy shares on the Shanghai Stock Exchange and Chinese mainland investors can buy shares in Hong Kong.
6 The concept of leapfrogging has been used as a theory for developing countries which may accelerate progress and modernization by skipping inferior, less efficient, more expensive, or more
polluting technologies and industries and move directly to more advanced ones. Another example would be the direct adoption of solar energy technologies by developing countries without
the need to first create an energy infrastructure based on fossil fuels as was the case for most developed countries.
7 BlackRock Research
8 Source: Morningstar Manager Research: Frontier Markets Begin to Emerge, 17 December 2014.

Important Information
Published on 1 December 2015.
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