Diversify your emerging exposure with BlackRock Frontiers

A way to access frontier markets is BlackRock Frontiers Investment Trust (BRFI), which invests in these and companies in countries that are not part of MSCI World Index or one of the eight largest in MSCI Emerging Markets Index. 

Between BlackRock Frontiers Investment Trust’s launch in December 2010 and the end of October last year, it made a net asset value (NAV) total return of 78 per cent, compared with 58 per cent for MSCI Frontier Markets index and 41 per cent for MSCI Emerging Markets index, according to analysts at Winterflood.

The trust has an attractive yield of 4.9 per cent, although growth is its primary focus, and it has increased its dividend every year since launch. The dividend has been covered by revenue every year except in 2016. “A covered dividend is attractive as the underlying capital base is not eroded and the payout should be more resilient in periods of market decline,” comment analysts at Stifel.

The trust has been run by Sam Vecht, head of emerging Europe and frontier markets at BlackRock, since launch. It is co-managed by Emily Fletcher and they are well supported by BlackRock analysts.

Because of its attractive profile it has often traded at a premium to net asset value (NAV), but over the past year has often been at a discount or trading close to par, so now could be a cheap entry point.

However, the lower rating is for a reason: the trust has underperformed MSCI Frontier Markets index and its hybrid benchmark, MSCI Emerging ex Selected Countries + Frontier Markets + Saudi Arabia Index recently. There is no guarantee that the trust’s performance will return to form, and it has traded at wider discounts to which it could swing out to again.

Frontier markets are less developed than emerging markets, so are regarded as even higher risk.

The trust can levy a performance fee, although this has not been triggered during its past two financial years. This means that its ongoing charge, which was 1.39 per cent at the end of its last financial year, can be higher when it outperforms.

The trust has underperformed for reasons including exposure to Argentina and its holdings de-rating. But analysts at Stifel point out that the companies it holds are not suffering from weak operating performance and their earnings, on average, have grown at 10 per cent a year over the past five years. This could in time be reflected in their valuations boosting the trust's performance.

Mr Vecht and Ms Fletcher have demonstrated their ability to largely make the right calls over the long term, and more than compensate investors for the performance fee.

Although frontier markets are very risky the trust is well diversified geographically, so if something goes wrong in one area it should still have considerable exposure to areas that are doing better. Analysts at Winterflood also say that frontier market risks are mitigated by the lack of correlation between the various markets.

And the trust doesn't only invest in frontier markets enabling it to diversify its risk even more.

So if you have a very long-term investment horizon and high risk appetite, meaning you can tolerate periods of underperformance, BlackRock Frontiers Investment Trust still looks well placed to deliver strong growth over such time periods. And if its performance returns to form its discount could return to a premium, meaning that now could be a good entry point. Buy.