Expert investors and analysts have been saying it for years: economies in the emerging markets have become so sophisticated that the so-called frontier markets are becoming the place to find richer yields.

In early October, Russell Investments of Tacoma launched an index group that investors can use as a benchmark for such holdings in their portfolio. The Russell Frontier Index will initially include 683 stocks from 41 countries, none of which are represented in the Russell Emerging Markets Index or Russell Developed Index.

The new listings will kick off with the Russell Frontier Large Cap Index, the Russell Frontier Small Cap Index and the Russell Frontier Gulf Cooperation Council Index. The benchmarks are float-adjusted and represent 98% of the cumulative, liquid market capitalization of the frontier countries.

Interest in the frontier markets has increased lately, mainly as companies from emerging economies have started to march nearly in lockstep with the developed world. The wrinkle is that their securities trade more like ones in developed markets, which diminishes their negative correlation.

"Portfolio management and diversification becomes more challenging," according to Steve Wood, a chief market strategist for Russell. "Investors want to be able to identify and verify the relationships between different asset classes and opportunities."

Investors are looking for standout companies in regions that are characterized by limited market accessibility, small company size and low liquidity, according to Russell. Those operating conditions have improved, as restrictions on foreign investment have eased and the markets have become more investable.

The Russell Frontier Index offers broad coverage of African countries, including Nigeria, Kenya, Mauritius, Tunisia, Togo, Senegal, Botswana, Ghana, Namibia, Gabon, Tanzania and Zambia. Africa is considered by many frontier managers to be a crucial market that has, until now, been underrepresented by existing frontier indexes, according to Russell.

Nigeria, for instance, is an important frontier market economy. It has the world's 10th-largest oil reserve, Russell said, citing the Central Intelligence Agency, and is a member of the Organization of the Petroleum Exporting Countries. To the relief of foreign investors, its main oil-producing region, the Niger Delta, is stabilizing, and the country has had several democratic transfers of power.

Elsewhere on the continent, Russell said, Ghana is the world's second-largest cocoa grower, after the Ivory Coast, and it is the continent's second-largest gold producer after South Africa.

But opportunities abound in other countries, too. Vietnam, for example, has become a manufacturing and outsourcing destination for China.


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