PMNA: PowerShares Opens the Frontier with New ETF

With high returns and a low correlation to existing global markets, “frontier” marketplaces have become increasingly popular among investors. Hailed as the next generation of emerging markets, promoters of frontier markets have been suggesting that this new generation of investments could offer BRIC-like returns in the years to come. While the U.S. continues to sweat under the strain of credit concerns, fund issuers have begun to explore increasingly remote regions of the globe, looking to create opportunities for investors to diversify their portfolios back home.

On July 7, PowerShares officially announced that its “frontier offering,” PowerShares MENA Frontier Countries Portfolio (PMNA), debuted on July 9 (5-day chart to the right). Designed to track the OMX Middle East North Africa Index, PMNA offers exposure to the securities of companies that are traded in frontier countries in the Middle East or North Africa.

“We believe PMNA represents a compelling new vehicle for investors to access frontier equity markets of the MENA region,” said Bruce Bond, president and CEO of Invesco PowerShares, in the fund’s press release. If the countries represented by the portfolio repeat 2007’s average growth rate, which PowerShares cites at 5.35%, PMNA may represent a new reserve for returns in a gloomy U.S. economy.*

PowerShares’ announcement comes on the heels of Claymore’s launch of FRN, the Claymore/BNY Mellon Frontier Markets ETF, in mid-June. FRN is based on the Bank of New York Mellon New Frontier DR Index, which is designed to track the performance of depository receipts of companies from countries that are defined as part of the frontier market.

PMNA, on the other hand, comprises companies that are domiciled or principally traded in the frontier countries. While this approach takes out the safeguard that receipts supply, PowerShares has designed PMNA with these risks in mind. In his press release Monday, Bond noted, “The PowerShares MENA Frontier Countries Portfolio replicates an index that takes into account certain foreign ownership limitations encountered when investing in certain countries in the Middle East and North Africa.”

PowerShares’ methodology should remove the onus from individual investors who do not have the resources to investigate limits on foreign investments. On a quarterly basis, NASDAQ OMX Group (NDAQ), Inc., the index provider, will rebalance and reconstitute the index, taking into account the current foreign ownership limitations and locked-in stock. In addition, when a security in the index reaches its limitations on foreign ownership, it will be removed from the underlying index.

In return for investors’ risk, PMNA offers them exposure to more than three times the amount of companies that FRN does. With the index currently comprising 50 companies, PMNA seeks to offer unprecedented diversification to investors, as many global indexes have higher correlations to one another.

Despite inherent risks in international investment, PMNA may offer more stability than emerging market funds. In a three-year test of returns, the NASDAQ OMX Middle East North Africa Index proves less volatile than the MSCI Emerging Markets Index: 19.23% versus 21.29%, respectively, according to the fund’s fact sheet.

While PMNA’s portfolio does not include all the countries that fall under the definition of “frontier,” its concentration offers investors good exposure to the regions advertised. While both FRN and PMNA include countries that are also classified as “emerging markets,” PMNA’s portfolio tackles a specific region of frontier markets rather than trying to encompass every country that might qualify.

One such area that FRN doesn’t include is the United Arab Emirates. PMNA’s index offers exposure to the UAE through allocations in Dubai and Abu Dhabi. As of June 30, investment in the United Arab Emirates accounted for 19.04% of the fund’s portfolio, making it PMNA’s second-largest country allocation. The UAE has experienced an influx of publicity in the last several years and has remained an example of the Middle East’s potential beyond oil. Home to many U.S. household names, the UAE has also been sheltering an increasing amount of expats, who are sharing in different facets of the booming economy. As companies have increased their stake in the UAE, PMNA has become an even more attractive investment to individuals.

Certain countries, such as Egypt, could fall under the category of either “emerging” or “frontier,” so it is important to check your existing foreign exposure to see where overlap occurs. Foreign investments are risky by nature, and the risks associated with investing in frontier markets are greater than in other regions. PowerShares Momentum Tracker does not currently include PMNA in its fund universe, but it does follow certain emerging markets by tracking PXH, the PowerShares FTSE RAFI Emerging Market Fund.

In a study late last year, Citigroup Global Markets Equity Research predicted that “from 2004 to 2008 it is expected that the six Middle Eastern countries that make up the Gulf Cooperation Council [GCC] will have generated an oil surplus worth U.S. $1.1 trillion — equal to $30 million per GCC resident.”** If returns like these materialize, PMNA may generate enough momentum to enter into our universe and onto our charts.

* Source: Powershares.com

** Source: Citigroup Global Markets Equity Research, “Investing in the Middle East.” Nov. 16, 2007. GCC countries include Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates [UAE] and Oman.

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Comments

[E Nuff Sed]

Investor's beware. These countries have very opaque markets rife with insider trading (more the rule than the exception) i.e., the markets are not efficient by a long shot. It is better to find a mutual fund which can assess management, rather than picking a basket.