Get uncorrelated growth with BlackRock Frontiers

BlackRock Frontiers Investment Trust (BRFI) is one of the few options available to private investors in this area. In addition to frontier markets such as Argentina and Vietnam, it can also invest in countries with similar, attractive characteristics that are not classed as frontier markets, such as Saudi Arabia, and in some emerging markets, such as Egypt and Peru.

Frontier markets are currently looking cheap compared with developed markets, with the MSCI Frontier Markets Index trading at a price/earnings (PE) ratio of 14.7, compared with a PE of 20.65 for the MSCI All Countries World Index.

And unlike large stocks in more mature markets, frontier market stocks are still experiencing strong earnings growth. The managers of BRFI believe that the underlying investments in the fund can continue to generate earnings growth of 10-15 per cent a year.

Anthony Stern, an analyst at broker Stifel, says: "While we believe a discount to developed markets is justified for frontier markets, it is wide relative to history. Unlike markets in the developed world, almost all of the returns in frontier markets over the past five years have come from earnings growth as there has been no significant multiple re-rating."

Frontier markets can also provide useful diversification because their economies tend to be less correlated with the rest of the global economy.

Since its launch in 2010 BlackRock Frontiers has performed strongly. Over five years, its share price has returned 136 per cent, beating the 92 per cent return from its benchmark, the MSCI Frontier Markets Index. It also outperformed the index over three years, achieving 39 per cent compared with 23 per cent.

And although the trust’s objective is long-term capital growth it has an attractive yield of 3.4 per cent, generated from the income it receives from its investments.

The trust is run by experienced managers Sam Vecht and Emily Fletcher, who benefit from BlackRock’s extensive resources in frontier and emerging markets. The managers analyse both the wider macroeconomic picture of frontier economies and companies' individual attributes, including their cash flow, dividend growth and management. Generally the trust will not invest in a company before they have met management at least five times.

The trust's highest country weighting is Argentina, which makes up 15.1 per cent, followed by Romania (9.5 per cent), Kuwait (9.1 per cent), Vietnam (8.5 per cent) and Kazakhstan (8.1 per cent). Recently the managers have reduced their exposure to Pakistan from 9 per cent to 3 per cent, due to a drop in its currency that has been driven by a deterioration in the country’s current account balance. But they are seeing opportunities in Egypt (currently 5.9 per cent of the portfolio) due to an improvement in the country’s trade deficit and positive reforms made by the government. The trust’s largest three holdings – a Kazakhstani bank, a Kenyan financial services group and an Argentinian bank – are all financials, which make up roughly a third of the portfolio.

The benefit of investing in frontier markets is their strong potential for growth. However markets in eastern Europe, sub-Saharan Africa, the Middle East, Asia and South America typically have less liquid stock exchanges and lower market capitalisations. This generally makes them more volatile and therefore higher risk – and more expensive – option for investors too. 

The trust has a high ongoing charge, including a performance fee of 2.39 per cent. Meanwhile, over one year it failed to beat its benchmark. And due to its strong long-term performance record, it is also trading on a premium to net asset value (NAV) of 2.7 per cent. 

But the current premium to NAV is below its 12-month average of 3.4 per cent and the trust has performed very well over the long term. Meanwhile, the trust is one of the few options in this specialist area and investors have been well compensated despite the costs.

So if you can handle the risk and have at least a five-year investment horizon, BlackRock Frontier Markets offers access to companies with strong growth potential via a specialised management team with a good record of success. Buy. EA.

BlackRock Frontiers Investment Trust (BRFI)

Source: Winterflood Securities as at 29/08/17, *BlackRock as at 31/03/17, **AIC, includes performance charge

Performance

Source: Winterflood Securities as at 29/08/17

Top 10 holdings as at 30/06/17 (%)

Source: BlackRock

Source: BlackRock