When the U.S. economy beganto fall in late 2007, it was the first in a long line of tumbling dominoes. By the time the global downturn was in full force, no corner of the world was unscathed. Everyone-and everything-was down. Diversification didn't seem to matter.

Once the recession began to subside, however, the search for diversification resumed. Many investors looked abroad, seeking to take advantage of economies that were growing at a rapid rate. And who could blame them? As the U.S. struggled with skyrocketing unemployment, a real estate crisis and paltry growth, many emerging markets were making significant and vital shifts in their economies-and seeing growth numbers that justified their efforts.

A decade ago, investing in emerging markets was a bold move. At the time, China was entirely dependent on U.S. demand, and Russia was recovering from a financial crisis of its own. Today, more than 157 mutual funds and ETFs focus on the emerging world, and it has proven to be one of the best investment categories of the decade. If you invested only in domestic markets for the past 10 years, you'd be nearly flat. Over the same period, investing in the BRIC countries (Brazil, Russia, India and China) would have more than doubled your money.

But there's something new to this trend. A handful of sophisticated investors are looking even further in their hunt for global diversification. They are bypassing the double-digit GDP growth numbers and the free-flowing credit systems of China, looking beyond the proliferation of bridges and railroads of Brazil. They're exploring a new type of uncorrelated asset class-frontier markets. In 2009, $46.1 million flowed into frontier equity funds, according to data aggregator EPFR. So far this year through April 7, the sector had taken in more than eight times that amount-$386.9 million.

RISKY BUSINESS

But what are these frontier markets? Do they offer the same growth opportunities as emerging markets did 10 years ago? And how can financial planners add them to their clients' portfolios?

Farida Khambata, who led the International Finance Corp.'s Emerging Markets Database, coined the term "frontier markets" in 1992. It describes economies around the world with a lower market cap and liquidity than emerging markets. You could say they encompass economies that have not yet joined the MSCI developed or emerging-market universe, says Larry Speidell, chief investment officer of Frontier Asset Management. Or, he says, you could define it as any market whose population has an average income below $11,000 per capita.

MSCI Barra classifies the sector as comprising 29 countries, including Argentina, Bulgaria, Jordan, Kazakhstan, Lebanon, Nigeria, Qatar and Vietnam. Their people are typically poorer, and their middle class is usually rising. Their stock markets are smaller with less publicly traded companies and, therefore, less liquidity. They're also one of the riskiest sectors in the market today.

As with any nascent economy, frontier markets present ample political risks. From corrupt government ownership of the few public companies to mercurial government structures, a lack of stable governance in these markets can set the country's economy on a path toward development-or set it back 10 years.

"It's kind of like picking a venture capital company," says Churchill Franklin, executive vice president and COO of Acadian Asset Management. "Any of these countries can have a change of leadership that takes it in the right or wrong direction. You just don't know."

Another risk is that many of these countries have few public companies. The existing ones are often based around a single resource or industry, providing more cyclicality and less diversification. Most of the economies are export-oriented as well, depending heavily on other economies to purchase the natural resource that keeps them going. The key to their development will be whether these countries can leverage their whole economy-not just the single natural resource they have to offer, says Don Gervais, global head of fundamental equity product management at Goldman Sachs. China is the model here; over the past year and a half, the country has successfully done just that.

WHY NOW?

So what's attracting investors to these far-flung markets? When one bubble bursts, another forms, and that's what many believe is happening in the emerging markets. Still scarred from recent turmoil, investors aren't interested in sitting around and waiting for the next crisis.