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In Frontier economy assets, Diversification is key

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Financial advisors need not lean on promises of decades of growth to persuade clients to buy either equity or debt from the so-called frontier markets.

Rather, the driving force for such investments should be diversification, which will mitigate total asset portfolio volatility, some say. Others remain focused on frontier markets’ long-term growth potential.

But both camps recommend investing in debt and equity in those markets.

“I don’t think I have ever had a client who has walked in and suggested investing in ‘frontier’ markets,” says Keith Goldner, a senior advisor at Wexford, Pa.-based Gibson Capital. But he regularly raises the topic and recommends investments in equity and debt tied to economies that fall into the “frontier” category, including those of Argentina, Bahrain, Kenya, Pakistan and Serbia.

Goldner steers clear of advocating for those investments and doesn’t argue that the frontier market investments will follow their emerging markets counterparts, which in the past 10 years have generated double-digit returns.

Instead, he thinks that the debt and equity markets are attractive simply because they offer diversification.

Investors should expect volatility in these markets, but it won’t correlate with domestic debt and equity markets and will therefore reduce the total asset portfolio volatility, Goldner says.

The diversification argument outweighs those based on forecasts about long-term growth in frontier market economies, he says.

“You don’t have to bet on their long-term growth. That will just be a return enhancer,” Goldner says about the frontier markets.

Timothy Atwill, however, thinks that long-term growth rather than diversification ranks as the primary driver for emerging and frontier market investments both on the equity and debt sides.

Atwill, managing director of investment strategy at Seattle asset management firm Parametric, prefers equity over debt investment in those markets, though he understands the need for both.

“Historically, people have gotten higher yields on debt, but those types of assets worry me a little more because there is much more of a currency component to them than there is to equity,” he said.

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.

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