Frontier Equity Markets: Risk Parity Lessons for 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 can 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. Historical data shows that even if portfolio managers cannot follow a risk parity asset allocation strategy due to benchmark tracking considerations, overweighting frontier markets can help them outperform their benchmarks during upside periods without increasing downside risks significantly.