U.S. regulators issued an alert Thursday, warning investors about the added risks of investing in so-called “frontier markets”.
The Financial Industry Regulatory Authority (FINRA) issued the bulletin, which cautions investors interested in funds that invest in frontier markets to carefully consider the heightened risks in these markets. Frontier funds generally invest in companies that are based in countries with developing securities markets, such as Argentina, Lebanon, Nigeria, Slovenia and Vietnam, it says; although there is no precise definition of a frontier market.
“Investors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk—and the past performance of any fund is never a guarantee of future results,” said Gerri Walsh, FINRA’s senior vice president for investor education. “Before investing in a frontier fund, investors should consider whether and how such an investment might fit as part of a well-diversified portfolio.”
FINRA advises investors to understand which countries a fund invests in; to be aware of the added geopolitical and currency risks; and, to pay close attention to fees and costs, which can be higher than other emerging market investment vehicles, and substantially higher than more conventional, diversified funds. It also stresses that, as frontier funds are relatively new, most of them have limited performance histories; and, it reminds investors that use index funds to pay attention to changes in the composition of indexes.