Adventurous investors might consider "frontier" markets — country markets so small and illiquid they fail to qualify as emerging markets.
Officials at Acadian Asset Management Inc., Boston, are trying to raise $200 million from institutional investors for 20 of these exotic stock markets, which range from Croatia to Cote d'Ivoire. No one is biting yet, but several endowments and foundations are looking closely, said Churchill Franklin, executive vice president.
The attraction is that some of these markets — such as Ukraine, Bangladesh and Nigeria — might evolve. Also, for the 10 years ended Dec. 31, the S&P/IFCG Frontier Composite index returned 11.6% annually, compared with 8.3% for the IFC Emerging Markets Free index.
What's more, correlations with developed markets are low — 0.51 with the MSCI EAFE for the three years ended May 31, and 0.3 with the MSCI U.S. index. In contrast, the MSCI emerging markets index's correlation to EAFE was 0.85 and 0.75 to the U.S.
But the risks are huge. The markets are small and illiquid, and reliable data on stocks is limited. Most important, the lack of clear legal standards and settlement and custody systems makes it tough to ensure you actually obtain the stock you buy.