MSCI Frontier markets dying? Frontier equity markets are in danger of dying as many of the nations making up frontier market indices graduate to “emerging market” status, Natasha Doff, Isobel Finkel, and Tracy Alloway write for Bloomberg. This graduation risks removing the largest and most liquid of the frontier markets. “With few obvious candidates to replace them, analysts at Citigroup Inc. have been sounding the alarm on what they’ve dubbed the “index problem” besetting a genre whose returns beat more-developed peers over the past five years.” Hertta Alava, who manages a frontier fund for FIM Asset Management says “you have to ask what is left in the Frontier Index … If Pakistan and Argentina leave the index, it won’t be a very attractive composition any more. I think more and more funds will choose not to track the index.” Pakistan is being re-categorized as emerging market next month by MSCI with Argentina and Nigeria also being considered for reclassification.

Ashmore Group fund manager Andrew Brudenell is not too worried and hints that it could be part of a normal cycle. “I’ve seen liquidity come and go … Things get very liquid and very enthusiastic and then they dry up. You need to understand how to construct your portfolio based on what’s realistic liquidity in the market,” he says. Citi’s Andrew Howell disagrees, saying that while it is not a major problem for active investors, the growth in passive investing and how flows could decide inflows and outflows into index funds. He says he would like to see MSCI add more frontier markets into its benchmark including Georgia, Ukraine, Cambodia. He also suggests producing a new more-liquid frontier-EM index, “an amalgamation of emerging-market countries such as Egypt and Colombia and frontier stocks.” Alava is less worried and says there are more prospects for frontier markets. “There are over 100 countries in the world that don’t have a proper stock market yet … So there will be new countries, but it will take time,” he says.