The Financial Industry Regulatory Authority says when it comes to putting assets into countries like Lebanon, Nigeria, Vietnam, Slovenia and Argentina, investors should carefully consider the “heightened risks.”
FINRA issued an investor alert Thursday to encourage investors — and their advisors — to review the pros and cons of such investments before using them to diversify portfolios and boost performance.
“Investors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk — and the past performance of any fund is never a guarantee of future results,” said Gerri Walsh, FINRA’s senior vice president for investor education, in a statement.
“Before investing in a frontier fund, investors should consider whether and how such an investment might fit as part of a well-diversified portfolio,” Walsh said.
While there’s no exact definition of a frontier market, the phrase tends to refer to countries that are less developed than emerging markets like Brazil, Russia, India and China.
The legal, financial accounting and regulatory infrastructure of frontier markets may be weaker or less developed, and political stability may be more of a concern in the frontier nations, FINRA notes.
This means their market depth and breadth is likely to be limited, and capital flows are probably more restricted with fewer investor participants and major companies than in the emerging markets.
Some funds invest in more than 30 frontier markets; others invest more narrowly. The same is true of their sector holdings.
FINRA described the frontier markets as risky earlier this year, when it added frontier funds to its list of products that it was watching in terms of both advisor marketing and investor suitability.
But recent performance and investor interest may have prompted the regulatory group to issue its warning on Thursday.