There are 24 countries included in the MSCI Frontier Markets index, ranging from Argentina (a former emerging market) and Nigeria to Kuwait and Kazakhstan. And it's precisely the makeup of the index that's causing it to perform so badly, analysts said.
"Index providers take the biggest, most liquid stocks, mostly financials," said Thomas Hugger, CEO of Asia Frontier Capital, which manages the $15 million AFC Asia Frontier Fund.
In frontier markets, "the big story is the consumer. Consumer stocks are normally small," he said, noting that not only are they not well featured in the index, another particularly important frontier segment - infrastructure - is also absent.
The MSCI Frontier Market index is nearly 54 percent weighted toward financials, with almost 10 percent in the hard-hit energy sector. Consumer discretionary stocks make up less than half a percent.
MSCI declined to directly comment on how well its index represents frontier markets' economies. Many frontier market shares may be excluded by the MSCI methodology, which imposes restrictions including minimum free-float requirements and a minimum proportion of shares still available to foreign investors. MSCI also has the MSCI Frontier Markets 100 index, which is used as the basis for at least one exchange-traded fund (ETF), the MSCI Frontier 100 Index Fund. That index includes the 100 largest components of the "parent" index and is also down around 17 percent this year.
AFC's fund outperformed the index, but was still down 2.1 percent in the January-November period; Hugger said December's performance was likely to be positive.
That fund isn't the only one looking for stock picks outside the benchmark indexes.
"You have to look at frontier markets as an opportunity set to pick the right countries and the right stocks, rather than saying 'will the frontier markets index be up or down?'," said Dominic Bokor-Ingram, co-manager of the Charlemagne Magna New Frontiers fund, which has about 12 million euros ($13.2 million) under management.
The Charlemagne fund totted up a nearly 4 percent return from the beginning of the year through December 17, according to data from Morningstar, making it among the best-performing of the frontier-market funds domiciled in Europe, Asia and Africa. Morningstar doesn't have a frontier category for U.S.-based funds.
Bokor-Ingram said 80 percent of his fund's picks weren't in the MSCI index.