The pursuit of returns has pushed investors deeper into the developing world in recent years, as emerging markets have dropped to a somewhat lower growth trajectory.
So-called frontier markets, which are a little further behind emerging markets on the development spectrum, have, in recent years, generated superior growth rates for brave investors.
As a result, like most developed stock markets, even those non-traditional markets have gotten a little expensive, said Louis Lau, director of investments at Brandes Investment Partners LP.
"We've seen valuations in frontier markets go up quite a bit in the last few years," he said. "Because Brandes is more value-oriented … when the sector is hot, we probably won't take a very big position."
When diversifying out of the developed world, investors have traditionally focused on the stars of the emerging world, namely the BRICs – Brazil, Russia, India and China.
In the aftermath of the global market crash in 2008-09, that group of emerging markets generated the superior returns investors sought.
But the BRIC basket of markets has faltered on the economic front, with GDP in Russia and Brazil expected to shrink this year, while China has slowed meaningfully.
Meanwhile, a number of frontier markets, including Nigeria, Kenya, Vietnam and Paraguay, are forecast to grow by between 4.5 per cent and 6.5 per cent, according to a report by U.S. retirement fund provider TIAA-CREF.
"The economic buoyancy of frontier markets and search for higher yield has translated into solid returns recently for both stocks and bonds, especially when compared to the broader emerging markets universe," the report said.
While the MSCI emerging markets index posted back-to-back declines of 2.6 per cent in 2013 and 2.2 per cent in 2014, the MSCI frontier markets index advanced by 26.3 per cent and 7.2 per cent, respectively.
Frontier market bonds also beat out their emerging-markets counterparts, returning 10.5 per cent in 2014, as measured by the J.P. Morgan next generation markets index, nearly doubling the return of the comparable emerging-markets index, according to TIAA-CREF.
A number of frontier markets have advanced economically, with an increase in GDP per capita giving rise to a middle class and a greater representation of the services sector in the broader economy.
Frontier markets, unlike emerging markets, also tend to be less correlated to major equity markets.
"They are less influenced by global economic cycles than emerging or developed markets, and therefore their returns tend to reflect domestic more than international economic conditions," TIAA-CREF said.
Frontier-market exposure of between 5 per cent and 10 per cent of an emerging market portfolio can improve a portfolio's diversification while giving access to higher potential returns, Brandes's Mr. Lau said.
Investors can access that kind of allocation through a number of actively managed, diversified emerging market funds, he said.
But he cautioned that frontier market outperformance, even after considering a drop-off since last fall, has resulted in a valuation on an index level that is comparable with emerging markets, despite having a higher level of risk. Frontier markets, on average, may struggle to continue to beat their more developed counterparts.
A less risky way to get frontier market exposure might be through foreign companies catering to those markets.
MTN Group Ltd., for example, is a telecom company based in South Africa that generates more than half of its cash flow from Nigeria, Mr. Lau said. "It's possible to find frontier market plays in emerging companies that have better liquidity."