Frontier Markets Index Tracks New Asset Class


By Gordon Platt

Russell Investments, based in Washington state, introduced a new index, the Russell Frontier Index, that initially includes 683 stocks from 41 countries, none of which are included in the firm’s emerging-markets or developed-country indexes. “Interest in frontier markets has accelerated lately, as emerging countries increasingly show higher correlations with developed countries,” says Tereasa Gandhi, a senior research analyst at Russell Investments. “More investment managers are evaluating frontier markets as a distinct asset class for asset allocation and a new-found place for obtaining alpha.” Alpha is the value that a portfolio manager adds, or subtracts, from an investment as compared with the market average.

Russell says its studies of the recent behavior of investment managers suggested the need for more-robust niche indexes offering broader coverage of frontier markets, particularly in Africa, the Caribbean and some Southeast Asian countries. Russell also announced large-capitalization and small-capitalization frontier indexes, as well as a frontier index that excludes the Arab Gulf nations of Bahrain, Kuwait, Oman and Qatar.

Russell’s methodology ensures that weights are adequately distributed across countries in the index, allowing managers who invest in frontier markets to diversify their country risk, Gandhi says. The Russell Frontier Index is a float-adjusted benchmark that limits any one country’s weight in the index to 15% in order to minimize single-country risk.