It isn't often that mutual fund firms launch remarkable, truly unique new products. Certainly, exchange-traded, lifecycle, 130/30 and emerging-market funds have been among the most significant and popular offerings in recent years.

Earlier this month, Fidelity Investments may have invented yet another new iteration of a mutual fund with its innovative suite of target-date retirement income funds that offer a simplified, one-stop solution many retirees and financial advisers might readily embrace.

The trouble is, once one fund company comes out with a breakthrough, compelling new type of mutual fund, it's inevitably dwarfed by a stampede of imitators-dulling the innovator's original appeal and resulting in a crowded field of indistinguishable commodities.

Now, however, some intrepid emerging-market funds are venturing into a fascinating new territory few others are likely to attempt: investing in such exotic locales as Latvia, Bangladesh, Namibia and the Ivory Coast.

The venture is noteworthy, given that the stock exchanges in some of these places trade fewer than 10 listings. How portfolio managers of these so-called "frontier funds" can reliably research their investments and fairly value them is a mystery, so much so that in next week's issue, we will explore how they accomplish this task in greater detail.

As to why portfolio managers are assuming the additional risks inherent with frontiers that go way beyond those of emerging-markets-including a lack of liquidity, transparency and strong regulations, not to mention wild fluctuations in exchange rates, inflation and the risk of political and social turmoil-some managers say it's simply because the emerging-markets space has become too congested.

"A lot of hidden gems are no longer hidden," Hugh Hunter, head of global emerging markets at WestLB Mellon Asset Management, told The Washington Post. "Clearly, frontier markets are the next tier. We have no option but to go forward in this area."

Others maintain that third-world governments now have the capital to spend heavily on infrastructure.

It's worth taking a look, given that the S&P/IFC Global Frontier Markets Index of 22 frontier nations is up 49% in the 12 months ended Aug. 21, while the S&P 500 is up 16%.

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

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