From The Financial Times, an interesting look at the S&P Select Frontier Index which consists of 30 of the largest and most liquid companies in markets excluded from the more mainstream S&P/IFCI Emerging Markets Index, primarily from smaller emerging markets such as Bahrain, Croatia, Jordan and Vietnam, plus some from more unexpected markets, such as Bangladesh, Cambodia and Zimbabwe:

“…Pakistan and Iran – in their own peculiar ways – are now the front line (if you’ll excuse the term) of a new style of high-risk investing- focused “frontier” markets.…the Select Frontier Index is currently weighted 29.87 per cent to Pakistan, 6.24 per cent to Colombia and 1 per cent to Cambodia. Pakistan is not only the most heavily- weighted country, it’s also home to the largest single index constituent: MCB Bank Limited, which represents 10.23 per of the whole index. Other larger constituents include the UAE’s Emaar Properties, Panama’s Copa Holdings SA and Jordan’s Arab Bank…

…Frontier investing can provide more than just high-risk growth potential, too. There’s evidence to suggest that frontier markets such as Pakistan are lowly correlated with the FTSE 100 and a good deal less volatile than you’d expect…

…There’s no fund tracking the S&P index as yet. But there is a specialist UK-listed “fund of funds” investment trust, run by Progressive, called Advance Frontier. It specialises in this sector and is currently invested in more than 30 countries.

Its manager, Tunisian-born Slim Feriani, is one of those enthusiastic types who likes to go prospecting for “hidden Gems” (global emerging markets). He says there’s value in Bangladeshi banks, boasting price earnings ratios of less than 6. He also thinks that Nigeria might be the next big thing. And he’s placed his biggest bet on Egypt, which currently comprises 9 per cent of the value of the portfolio. He recently started buying Pakistan again – although even he apparently stops at Iran.

But the brave investment professionals at Turquoise Partners go one step further. This Anglo-Iranian boutique investment bank offers one of the few investment funds that western investors can use to gain access to Iran. It is only for experienced investors with more than $250,000 to invest via loan notes issued in Iranian rials.

…Admittedly, the Turquoise fund is new and labours under a series of obvious disadvantages that we’ll touch on below (you might have guessed them already). Nevertheless, since its launch in May 2006, it’s up 43.47 per cent. Over the past 12 months, it’s up 31 per cent. And over the past three months, it’s up 13.61 per cent.

The fund managers reckon there are two big Iranian trends worth playing. The first is the inexorable growth of the consumer sector: in Iran, 75 per cent of the 70m population is below 25 years of age. That’s apparently good news for companies making health and beauty products, such as Behshar, the shampoo producer.

The second trend is a strong resources sector, which is seeing big investments in copper producers such as NCIC, and steelmakers, such as Mobarakeh Steel. A bountiful supply of cheap oil and gas also helps the ceramics industry – in Iran, this is even more competitive than China’s….”