In 2011, a senior economist at the International Monetary Fund wrote a paper examining the role frontier markets should play in equity investors’ portfolios.
Jorge Chan-Lau used a risk parity model, which attempts to spread exposure in a portfolio according to volatility estimates rather than, say, market capitalisation. After weighing up the data, Chan-Lau concluded that frontier markets should get a much higher allocation in investors’ portfolios.
Chan-Lau repeated one usual argument made in favour of frontier investing the benefits of diversification these markets offer. But he also said a strategy of “overweighting frontier markets could help portfolios outperform when global equity prices are rising”.