The attraction of investing in frontier markets is a chance to diversify your portfolio and attain high returns. However, there are inherent risks involved, as Katie Barker finds out
If you want certain tactical allocations frontier markets can be quite useful," says Scott Earthy, managing director of a US-based SFO. "There is also a lot of underling economic growth in those markets, so as some of the larger developed markets start slowing down, frontier markets are a place to look for growth."
However, he is also quite candid about the risks. "They are called frontier markets for a reason; they still have a way to go in their development," Earthy cautions. These risks vary depending on the market but most commonly include high volatility, inflation and a lack of liquidity and transparency.
There are some ways family offices can mitigate against the challenges posed by frontier markets, as Earthy explains. "Indirect investment is the best way for most families to enter frontier markets, unless they have prior exposure or experience in the region. There are simply so many things to know about a particular marker from the regulatory side, governance and legal structures and so forth, it is better to use someone with experience in that market."
Aside from using a manager you know and trust, due diligence on your market is also essential. "Make sure you get educated about the specific markets. The way that we do that in our office is that we meet with a lot of managers and get their insights over time. I think it's also important to visit the markets, visit some companies, talk to some local officials and really feel like you know what you are getting yourself into.
"You also don't want to put all your eggs in one basket. So look at different frontier markets and multiple investments within those markets," Earthy adds.
Despite the benefits of investing in such regions, and the steps you can take to minimise risks, Earthy believes frontier markets are not suitable for all family offices. "I think it's only a certain type of family office that can invest in frontier markets. If you just have a core staff of people managing the family office without experience in those markets and without the resources to go and do the appropriate due diligence, then you should probably stay closer to home or outsource to the appropriate parties," he says.
However, avoiding frontier markets is not necessarily a negative thing: "You shouldn't feel like you are missing out on something by not being there, it's not a given that everyone should be in the frontier markets," says Earthy. "It is a major commitment of time, money and resources so it is not a decision to be taken lightly."