Corpse Bias, the opposite of survivorship bias in Frontier Markets


Corpse Bias, the opposite of survivorship bias in Frontier Markets

Survivorship bias is the tendency to focus on those that have survived, be it the most successful businesses, internet unicorns, the success of survivors of any major event, or the tendency for indices to discount those companies that went defunct.  Most commonly, survivorship bias is used to explain the overly optimistic projections for mutual fund returns, as those with long track records are likely to be those that have survived.  Mutual funds with poor track records, would not survive.  For further information on survivorship bias, see here.

The MSCI Frontier Markets’ Index has the opposite problem, far more than its EM counterpart.  That problem is that countries that do well economically, become a larger and larger part of the market, before they are upgraded and gone forever.  Given that the Olympics are currently going on, the best parallel is a marathon, where MSCI tracks who is in 1st, 2nd, and 3rd only until they finish the race, and then follow a new 1st, 2nd, and 3rd, until they too complete the race.  Pakistan is set to leave the Frontier Markets Index, UAE and Qatar were announced previously.  Morocco could go back up if it sustains liquidity, Argentina has a new government and could very quickly see itself upgraded to Emerging Markets as well.  Going the other way, when countries are demoted from Emerging Markets to Frontier Markets it is usually because things in the country are going the wrong way, if we had our way, we would have this be known as corpse bias.

We could not find a historical list of all the changes MSCI has made, and we are certain that they are reticent to share this information, however, it can be pieced together from their various releases over the past year.  Shown below are all the classification changes made since 2008.

Year Country Change
2010 Israel Developed –  UP
2009 Jordan Frontier – DOWN
2014 UAE Emerging Markets – UP
2014 Qatar Emerging Markets – UP
2013 Greece Emerging Markets – DOWN
2013 Morocco Frontier – DOWN
2016 Pakistan Emerging Markets – UP
2017~ China Emerging Markets – UP


As investors, we have made repeated warnings about following indices here, and here.  What we recommend is that you invest based on some other metric that you or your organization are comfortable with, be it weighted based on the liquidity, market cap, or GDP of each respective economy or something else that makes fundamental sense.  Do not give MSCI or any other index provider the power over your portfolio that will result in inferior returns and an un-investable strategy.

As always, any questions, please let us know.

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