As international markets continue to dramatically outperform those in the United States, money is moving to more exotic regions.

T. Rowe Price garnered attention with its recent unveiling of an Africa & Middle East Fund. Plus, more investment companies are reported to be investing their emerging market funds in so-called "frontier" countries.

Vietnam and Morocco are countries in which some of the newer opportunities lie, noted Senior Analyst Bill Rocco of Morningstar. Fund managers are even exploring opportunities in Botswana, Latvia and Bangledesh.

But apart from T. Rowe Price, not everyone expects to launch retail funds devoted to so-called frontier countries.

"Vanguard does not offer any extremely exotic frontier funds,'" declared spokeswoman Rebecca Cohen. Rather, she said, the Vanguard Emerging Markets Fund is sticking with the well-diversified MSCI Emerging Markets Index as its benchmark, and not even all the countries in that index are in Vanguard's fund.

"Some of those markets only trade a couple of million dollars a day," Cohen explained. "Our funds grow so much. We don't invest in countries where there isn't good capacity or good liquidity." For example, Vanguard excludes Jordan and Morocco from the index.

By contrast, Jordan and Morocco are primary markets of T. Rowe Price's new fund. Although the fund holds some South African commodities, such as platinum, which it can't get exposure to in other countries, the fund actually is looking more aggressively outside that region to the sub-Sahara.

"The objective of this fund is to be flexible, not to be tied to an index," said Joseph Rohm, T. Rowe Price vice president.

Primary markets of the fund, managed by Christopher Alderson, include Bahrain, Egypt, Jordan, Kenya, Lebanon, Morocco, Nigeria, Oman, Qatar, South Africa and the United Arab Emirates. Other potential markets include Algeria, Botswana, Ghana, Kuwait, Mauritius, Namibia, Tunisia and Zimbabwe. The fund excludes Israel, which already is well represented in the company's Emerging Europe & Mediterranean Fund.

The T. Rowe Price fund debuted Sept. 4. Through Oct. 10, it had garnered $25.5 million in assets under management and was up 10.9%. It holds 32 companies, most with market capitalizations of about $1 billion. While Rohm admitted the fund is not for the faint of heart, he said it has the advantage of accessing a number of companies going public in sub-Saharan Africa and the Middle East. Safaricom, a Kenyan mobile telephone operator, for example, is expected to go public before year-end. "It's partly held by Vodafone and the Kenyan government," Rohm said.

While Rohm acknowledged the political risks, he said he met beforehand with the Kenyan minister of finance, who gave both his view on the government thinking around the IPO, as well as the view on the country's year-end election.

He also noted that the fund's markets are not correlated to other stock markets, and in particular, has no U.S. real estate exposure.

T. Rowe Price cites 7% annual growth in the sub-Saharan part of Africa over the last five years, fueled by the boom in commodity prices. Many African countries have had debt canceled by western countries. Significant banking and pension market reform in many states are apt to encourage loan growth. Meanwhile, regions in the fund have the common bond of being very driven by oil and financial services growth. They are not well discovered by investment bankers.

Jeff Tjornehoj, senior research analyst at Lipper, noted that companies investing in Botswana, for example, don't need to incur the expense or risk of keeping an analyst there. "The Botswana Stock Exchange has just 19 domestic companies listed. You can cover them with a desktop application. From that point of view, you only have small reputational risk."

Plus, he said, "there's a set of investors out there who want more refined emerging market exposure. The obvious consequence is if you need to sell a big block of Botswana stocks, there may not be so many buyers out there."

Tjornehoj added that Turkey is growing in popularity. "They're looking to gain entry in to the European Union. It's a bit of a play. Certainly, if they do gain entry, that could be a solid rally." But, he noted, liquidity can dry up quickly and "political situations have a way of unraveling quickly." He also warned that there have been "somewhat recent" attempts to control the flow of capital. "Malaysia comes to mind a few years ago. Those who invested heavily could not retrieve money over time. That has a way of dampening enthusiasm very rapidly for those markets."

Also, Tjornehoj said, if there's a problem, you don't have the fully developed legal structure and judicial structure we take for granted in the developed world.

Of the 115 emerging-market funds tracked by Lipper, ProFunds Ultra Emerging Markets Fund showed the most astounding gains this year, 86.26% total return as of Oct. 9.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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