Fund tips for frontier markets

But emerging markets are volatile and riskier - which is why the offer better rewards. Risks include inflation, asset price bubbles fuelled by 'hot money' and currency wars over exchange rate policies. There are also concerns over political and legal risk, and patchy corporate governance.

Jeff Molitor, Vanguard's chief investment officer for Europe, warns that investors may be overweighting emerging markets based on the widely held view that these economies will grow faster than developed markets, and thus their financial markets will outperform developed markets. However, looking back over the past 10 years, emerging markets investors were rewarded not because of high economic growth per se, but rather because of comparatively low equity valuations in the early-2000s coupled with consistently higher-than-expected economic growth throughout the period. Mr Molitor says it was the combination of reasonably-priced stocks and a 'growth surprise' that drove returns.

"Today, however, valuations between UK and emerging markets are at relative parity, suggesting that the case for continued outperformance of emerging market stocks may not be as concrete as either past returns or projections for economic growth would suggest," he adds.

The emerging markets story is hardly spent, but it is unlikely that growth will be as impressive as it has been for the last decade. In comparison, frontier markets are much cheaper and not being as developed as emerging economies, have further to grow.

■ Fund Tips:

Cautious: Investec Africa and Middle East Fund

Choosing a 'cautious' fund in the frontier markets space can be quite a challenge, given that this is a very high-risk area prone to extreme volatility. A good example is the New Star Heart of Africa Fund, which was launched in November 2007 and closed in 2009 with substantial losses for investors. When New Star first suspended dealings in the fund in early December 2008 it blamed difficulties in buying and selling stocks on religious holidays in Nigeria and elections in Ghana.

While a number of asset managers are launching funds focused on the frontier space, Investec Asset Management benefits from local knowledge in these markets and almost 20 years' experience. The Investec Africa and Middle East Fund, managed by the experienced Roelof Horne and co-manager Tarek Shahin, is available both as open-ended investment company or as an offshore fund. It has a relatively high exposure to Nigeria and Egypt (more than 40 per cent) with both countries expected to enjoy strong gross domestic product (GDP) growth in 2011.

Aggressive: db x-trackers S&P Select Frontier ETF

ETFs offering exposure to frontier markets are limited, although Chris Stevenson, vice president of Barclays Stockbrokers, predits that we could see more example frontier market trackers launched in 2011. While some investors would prefer the skill and know-how of an active manager in this space, there is a case to be made for the liquidity of an ETF, which is traded just like a share. The charges are also markedly lower than open-ended funds. db x-trackers S&P Select Frontier ETF tracks the S&P Select Frontier Index, which comprises the largest and most liquid frontier market stocks. The fund has a total expense ratio of 0.95 per cent.