Frontier Markets: Punching Below Their Weight? A Risk Parity Perspective on Asset Allocation

Abstract

Are frontier markets the next emerging markets? And if so, should global equity investors include them in their portfolios? From a risk parity perspective, investors could benefit from a frontier markets allocation well in excess of the market weight of the asset class. A risk parity portfolio tends to outperform a market cap-weighted portfolio during periods of positive equity returns while delivering comparable returns during crisis periods. Even if portfolio managers could not follow a risk parity asset allocation strategy due to benchmark tracking considerations, overweighting frontier markets could help them outperform their benchmarks during upside periods without increasing downside risks significantly.

Keywords: frontier markets, equity markets, asset allocation, risk parity, equity portfolios

JEL Classification: G11, G15, F13