Emerging market equities have been volatile enough to turn even the most bullish investor pale this year, following the combination of the Chinese growth slowdown and market sell-off, the global collapse in commodity prices and possible interest rate hikes from the Federal Reserve and Bank of England.
As a result, the MSCI Emerging Markets index has plummeted by 12.74 per cent in 2015 so far, underperforming the MSCI World index by almost five times over.
Performance of sectors in 2015
Source: FE Analytics
Frontier markets are often viewed as being even higher risk than emerging markets, due to common traits such as poor liquidity, deficient regulation and more volatile currencies.
However, the bruising that emerging markets have suffered this year could actually be an argument for investing in frontier, or ‘pre-emerging’, markets. 
“Historically, emerging markets have been uncorrelated with developed markets, which meant investing in the sector would provide diversification, although this only lasted up until around the turn of the century,” Cantor Fitzgerald’s Charles Tan (pictured) said.
“What we observed back then was that correlations between those two major equity asset classes seemed to converge. There are a whole host of explanations for that but, to my mind, I think it’s because the pool of money was chasing both of these equities.”
“If you look at frontier markets, the argument would be that frontier markets today have similar characteristics to what the emerging markets were exhibiting 15 years ago. It’s still relatively under-invested and because there hasn’t been so much foreign money going into these markets, when there’s a global sell-off there isn’t the same large amount flooding out of these markets. Therefore you still get that lower correlation in terms of equity returns.”
While IT Global Emerging Markets Equities is one of the 10 worst-performing sectors within the AIC universe this year, there is one trust that has managed to achieve a small positive return in spite of the turbulence in the markets – and it invests in frontier markets.
BlackRock Frontiers Investment Trust, which is managed by Sam Vecht and Emily Fletcher, has returned 0.43 per cent so far this year, which is 11.43 percentage points more than its peer group composite and 6.93 percentage points more than its MSCI Frontier Markets benchmark.
Performance of fund vs benchmark and sector in 2015
Source: FE Analytics
The five FE Crown-rated trust hasn’t just done well over the short term though. Since its launch in 2010, it has outperformed the IT Global Emerging Markets Equities sector average by nearly 30 percentage points and its benchmark by 6.41 percentage points.
In terms of the trust’s regional allocation, it has its largest weighting in Asia Pacific at 34 per cent, followed by the Middle East and Africa at 28 per cent and Europe ex UK at 13.1 per cent.
Of course this regions have also been affected by the headwinds blighting markets over recent months, so why has the £162m trust still been able to provide a return this year?
According to Winterflood Investment Trusts, BlackRock Frontiers Investment Trust’s regional diversification, reduced exposure to oil and its preference for Asian regions that are undergoing political change are some of the reasons the fund has performed so well.
“BlackRock Frontiers has performed well since its launch and we rate Sam Vecht highly. He puts forward a strong case for investment in frontier markets and we believe that it offers an interesting opportunity; with surprisingly low volatility but still potential for strong growth and relatively low valuations,” the firm said.
“Given the illiquidity of frontier markets, the strategy benefits from the fund's closed‐end structure in our opinion. In addition, the fund's dividend has been attractive, although given the focus on capital growth it may vary from year to year.”
Currently, the trust is trading on a 1.3 per cent discount and is geared at 5 per cent, which is the joint second-highest gearing in the sector alongside Utilico Emerging Markets.
The equities team at Cantor Fitzgerald believes that the trust, which is one of a handful of portfolios to provide access to frontier markets, is a good way to invest in the asset class, which they believe to be significantly under-invested.
“In our view, BlackRock Frontiers is a good way to invest alongside one of the most venerable names in fund management in what has typically been a high-growth, but admittedly volatile, region,” their fund report said.
“The managers point out that despite being a source of strong absolute returns with low correlations to other asset classes, global investors remain under-exposed to FM [frontier markets].”
The relatively low penetration of institutional funds illustrates this – according to research from Cantor Fitzgerald, there is currently around $20bn in institutional AUM in the space out of a total market cap of approximately $1trn. Emerging markets, however, have around $1,000bn in fund AUM compared to a $6trn market cap.
Investment company Silk Invest also believes that investors should be embracing volatility at the moment and that frontier markets are one of the best opportunities for investors, especially when noting their resilience in August.
According to data from FE Analytics, the MSCI Frontier Markets index outperformed the MSCI World index by almost double and the MSCI Emerging Markets index by 5.2 percentage points in August this year, losing just 3.6 per cent.
Performance of indices in August
Source: FE Analytics
While the region could look like an attractive investment opportunity for a number of reasons, Hargreaves Lansdown’s Laith Khalaf warns that there are still headwinds for the asset class that investors must be wary of.
“[Frontier markets] are obviously higher risk and even higher risk than emerging markets. I think if you’re investing in them you have to already have a well-diversified portfolio and probably have a relatively large portfolio as well – it’s not the kind of thing to go into as your first investment,” he said.
“They do have a place but the nature of the areas they are investing in can be politically unstable. You’ve got places in there that are probably going to feel the impact of lower commodity prices – places like Saudi Arabia, eastern Europe. You are taking on a lot of risk.”
BlackRock Frontiers Investment Trust yields 3.9 per cent an ongoing charge including a performance fee of 1.45 per cent.