Frontier Market Investing: Active Versus Passive

Abstract

Frontier markets began to attract attention 10 years ago. Since then, more than 30 active managers have established themselves, along with a handful of passive managers who track the indexes. The author believes it is worthwhile to examine the trade-offs in choosing active or passive frontier managers, including the elements of market definition, efficiency, results, and access. Although both active and passive investment approaches enable investors to gain exposure to frontier market equities, current research and data show that active management holds a decided edge. The ability of investors to focus their capital in the truly frontier non-Gulf Cooperation Concil countries and to benefit from the market inefficiencies presented by scarce liquidity, high bid–ask spreads, and low analyst coverage is severely diluted by the practical constraints faced by managers employing passive approaches.