Earlier this month, Standard and Poor's launched the first index series from a major index provider to cover African markets. Prior to that, at the end of March, the index provider rolled out a blue-chip index covering India - the S&P India 10 Index. It looks like the firm, always ahead of the curve on emerging and frontier markets, is continuing to leverage its advantage there.

A Narrow Slice Of India

The India index is an interesting animal. With only 10 components, it seems particularly narrow. Companies eligible for inclusion must have market capitalizations of at least $500 million and a monthly average daily traded value of $1 million. Rather than size, the components are selected and weighted based on liquidity, which actually makes a great deal of sense in an emerging market, where even the largest stocks may not trade all that freely. Stocks are selected from the S&P/IFCI India Index.

Component weights are capped at 20% of the index at each annual rebalancing. The top three stocks as of the end of February were Infosys Technology Ltd., with a 21.69% weighting; ICICI Bank Ltd., at 17.62%; and HDFC Bank Ltd., at 17.17%. Although the index was down 13.20% during the first two months of the year, it had a three-year annualized total return of 24.77%.

S&P accounts for the foreign ownership restrictions when determining a company's float, which should take care of the new restrictions imposed by the Indian government last year. Those restrictions have caused some tracking issues for the iPath MSCI India exchange-traded note (NYSE: INP). In addition, all the components are ADRs or GDRs trading on developed market exchanges, which will make it easier for foreign investors to access them.

"The index itself was designed to provide a high level of investability and liquidity to support index-linked investment products," said Steven Goldin, vice president of Portfolio Services at S&P.

Access To Africa

With investors beginning to look at frontier markets, Africa-a region that is frequently overlooked-is getting more attention. Although there are other indexes covering the region, S&P's Africa index series is the first of its kind to be launched by one of the large index providers. S&P has long maintained several emerging and frontier market indexes that cover African countries, and this series, which currently includes three indexes, is its first attempt to highlight African markets.

The S&P Pan Africa Index is designed to represent 80% of the market capitalization of each of 12 African markets-Botswana (0.38%), Cote D'Ivoire (1.06%), Egypt (10.17%), Ghana (0.16%), Kenya (0.86%), Mauritius (1.07%), Morocco (8.57%), Namibia (0.04%), Nigeria (16.23%), South Africa (60.56%), Tunisia (0.54%) and Zimbabwe (0.36%). It has a total of 333 companies, 138 of them South African, and represents about $362 billion in adjusted market capitalization.

Meanwhile, the S&P Africa Frontier Index excludes Egypt, Morocco, South Africa and Tunisia. Basically these are the countries that are classified as emerging markets rather than frontier markets: They represent nearly 80% of the pan-Africa index and almost two-thirds of its total number of stocks. As a result, the S&P Africa Frontier Index is largely dominated by Nigeria, which has a weighting of more than 80%. The frontier index has a market cap of just about $72 billion, about 20% of the total market cap of the broader index. However, the frontier index outperformed the broad index significantly, with annualized returns of 57.40% and 52.02% for the one-year and three-year periods, respectively, versus returns of 22.99% and 18.65% for the broad index. The frontier index also has a much higher Sharpe ratio: 1.43 versus 0.80.

The S&P Africa 40 Index includes the largest and most liquid stocks in the region. The companies must be domiciled or have most of their operations and assets based in Africa. Individual components are capped at 8% of the index at rebalances, while country weights are capped at 30%. Currently the index includes stocks from eight African countries: Congo (2.77%), Egypt (20.00%), Ghana (1.93%), Mali (5.78%), Morocco (20.18%), Nigeria (12.10%), South Africa (28.99%) and Zambia (8.25%). The index has a total float-adjusted market capitalization of $207 billion; the largest company is MTN Group Ltd., which is 7.03% of the index. Components must have market caps of at least $500 million and average daily traded three-month volume of $100 million.