Low trading volumes and government intervention pose challenges for investors. About $6 million of shares changed hands each day on Sri Lanka’s bourse during the past month, less than 1 percent of the $17 billion on the Shanghai Stock Exchange in China, data compiled by Bloomberg show.

Smaller volumes make it more difficult for money managers to sell holdings without affecting prices, Andrew Brudenell, whose $92 million HSBC GIF Frontier Markets fund returned about 24 percent last year, said in a Jan. 17 phone interview from London.

The MSCI Argentina Index tumbled 39 percent in 2012 and touched an eight-year low in November as President Cristina Fernandez de Kirchner seized control of the nation’s largest oil company and investors speculated the government may stop paying its international debt.

Fund managers can reduce risk by making long-term investments and avoiding countries that have a high chance of government intervention, said Thomas Vester Nielsen, who helps oversee more than $250 million in frontier markets as a senior money manager at Lloyd George Management in London. The LG Frontier Markets Fund, which returned about 37 percent in 2012, didn’t sell a single stock last year, he said.

‘Early Days’

One advantage of smaller markets is there are fewer money managers vying for access to politicians and company executives, according to Nielsen, who met with 284 companies in 24 countries last year. That makes it easier to visit with officials and gauge government policy and corporate strategy, he said.

Institutional investors have about $15 billion in frontier countries, said Schroder’s Sidani. That compares with about $330 billion in global emerging market funds, according to Cambridge, Massachusetts-based EPFR Global.

“It’s very early days for pension funds to have allocations to frontier markets because they are relatively small and illiquid,” Timothy Drinkall, the manager of Morgan Stanley Investment Management’s $54 million Frontier Emerging Markets Portfolio, which rose about 22 percent last year, said in a Jan. 23 phone interview.

Kenyan Beer

Scarce information makes on-the-ground research more valuable. The fifty biggest companies in the MSCI frontier index have about 9 analyst recommendations on average, versus 29 for the MSCI emerging market index and 33 for the S&P 500, data compiled by Bloomberg show.