Via BloombergBusinessweek, an interesting article on frontier markets and returns from picking stocks versus indexing:

Fund managers who focus on the world’s least-developed markets are trouncing their benchmark index—something most investors routinely fail to do. Mark Mobius’s Templeton Frontier Markets Fund and 12 similar funds investing in countries from Vietnam to Nigeria and Romania earned an average 24 percent last year, topping the 8.4 percent gain in the MSCI Frontier Markets Index. Their edge comes from uncovering undervalued stocks in markets where there aren’t crowds of well-informed investors. “The companies are overlooked and under-owned,” says Carlos von Hardenberg, an Istanbul-based money manager at Franklin Templeton Investments who helped the firm’s $1.3 billion Frontier Markets Fund (TFMAX) post a 24 percent gain last year.

The lack of information about frontier market companies creates opportunities for managers who do on-the-ground research. “Sometimes companies wonder why I’m there—they’ve never had a foreign investor visit before,” says Stephen Mack, who manages the Frontaura Global Frontier Fund, which returned about 18 percent in 2012. “You’ve just got to do the legwork.”

Hans-Henrik Skov, whose $58 million BankInvest New Emerging Markets Equities Fund climbed about 37 percent last year, boosted holdings in Nairobi-based East African Breweries (EABL) after he learned during a November trip that it’s successfully marketing lower-priced beers to Kenya’s poorest consumers.

Frontier markets are also less likely to move in lockstep with other world markets, another advantage for money managers who find it hard to distinguish themselves when stocks move in unison. “What happens in the U.S. has an impact on China’s exports, but it has less of an impact on how many beers the average guy in Kenya is drinking,” says Skov.

Profits of the 141 stocks in the MSCI index are projected to increase 16 percent in the next 12 months, vs. 15 percent for companies in emerging markets. Consumer spending in frontier nations will climb 9.2 percent on average this year, faster than the 8.3 percent pace in emerging markets, according to Euromonitor International.

Among the hazards of investing in frontier markets is low trading volume. Fewer trades mean money managers are more likely to affect prices when they sell holdings, says Andrew Brudenell, whose $92 million HSBC GIF Frontier Markets fund returned about 24 percent last year. And there’s also the risk of government intervention. The MSCI Argentina Index tumbled 39 percent in 2012 and touched an eight-year low in November as President Cristina Fernández de Kirchner seized the nation’s largest oil company and investors speculated the government may stop paying its international debt. Still, “these markets are tomorrow’s emerging markets,” says Rami Sidani, whose $57 million Schroder Frontier Markets Equity fund returned about 19 percent last year. “They’re offering great growth prospects.”

The bottom line: With returns averaging 24 percent last year, 13 frontier market funds beat their benchmark index.