Buy into emerging growth at a discount via BlackRock Frontiers Investment Trust

Companies in countries with fast-growing economies and increasing middle classes should have scope to grow faster than developed economies. But while the developing world is vast, most emerging market funds are dominated by companies listed in North Asia, notably China, South Korea and Taiwan, which account for 65 per cent of MSCI Emerging Markets Index.

So to access parts of the world that few funds cover it could be worth adding a frontier markets fund. These tap into less developed areas than emerging markets, but which have the potential for stronger growth. Despite strong economic growth forecasts in a number of frontier markets, their allocation in global indices decreased from 1.9 per cent in 2015 to 1.5 per cent in 2019, as performance in the US and emerging Asian markets has been much stronger. However, frontier countries still account for 11 per cent of the world’s gross domestic product and 30 per cent of the world’s population, according to analysts at broker Winterflood. 

One of the few options available to UK private investors for getting exposure to these areas is BlackRock Frontiers Investment Trust (BRFI), which has been managed by highly regarded managers Sam Vecht and Emily Fletcher since inception in December 2010. Although frontier markets have been badly affected by the pandemic, Mr Vecht and Ms Fletcher have become increasingly bullish because they believe that they offer growth, yield and cheap valuations, and performance started to pick up following news of successful coronavirus vaccines last year. They recently described valuations in frontier markets as “unbelievably cheap”, as they are attractively valued on both a yield as well as price-to-book basis.

Mr Vecht and Ms Fletcher have also ensured that the trust's holdings have strong balance sheets so they have a good chance of surviving until there is a global economic recovery. 

If their optimism is right, this could be a good time to invest. The trust’s relative long-term performance has been strong, with a share price cumulative total return of 67.5 per cent over the 10 years to 8 January. compared with 60 per cent for MSCI Frontier Markets index. Although it is not an income mandate, the trust had a net yield of 4.4 per cent as of 8 January. And it was trading at a discount to net asset value (NAV) of 1.8 per cent, although more often than not it has traded at a premium to NAV over the past five years. So if it does well going forward, the discount could tighten or move back to a premium.

The trust had 46 equity holdings and long derivative positions via contracts for difference on 19 companies, at the end of September 2020. It is well diversified, with Indonesia, Saudi Arabia, the Philippines and Vietnam its largest country positions. BlackRock Frontiers Investment Trust invests in 20 other markets including Kazakhstan, Pakistan, and Panama, differentiating it from mainstream global emerging markets funds. 

The trust's largest sector exposure is financials, in which it had 30 per cent of its assets at the end of November. Its managers believe that the banks they invest in are well capitalised and unlikely to face increased regulatory pressures. Consumer discretionary and industrials, meanwhile, are the two sectors the trust is most overweight in relative to MSCI Frontier Markets, so it looks well positioned for a global recovery. 

When the trust has performed strongly, it has been partly due to the shifting habits of the rising middle classes. For example, Vietnamese soymilk producer, Quang Ngai Sugar (VIE:QNS), has benefited from shifting preferences for its dominant Vinasoy brand. And Charoen Pokphand Foods (THA:CPF), a global agricultural conglomerate listed in Thailand, has profited from increasing per capita meat consumption across emerging markets.   

BlackRock Frontiers Investment Trust's managers also believe that improving global liquidity conditions are beneficial to the trust's prospects. There has been a huge increase in global money supply due to central banks’ responses to the pandemic. Analysts at Winterflood say that “this money is expected to chase yield and growth in the current low interest rate environment, and [BlackRock Frontiers Investment Trust's] managers anticipate that a significant amount will flow into emerging and frontier markets.”

The global drive for a low carbon economy is another important trend. Kazakhstan’s Kazatomprom (KAP) produces uranium which is used in the production of nuclear energy and has performed well as a spike in demand is expected. Greek offshore wind energy generator Terna Energy (GRE:TENERGY) and Chilean hydroelectricity company Colbún (CHIL:COLBUN)  have also performed well. 

Sociedad Química y Minera de Chile (CHIL:SQM-A), meanwhile, which made up 2.3 per cent of the trust's assets at the end of November, is the world’s biggest lithium producer. This is a key component in rechargeable battery cells, so the holding provides exposure to the rapidly expanding electric vehicles market.      

BlackRock Frontiers Investment Trust has performed poorly in recent years, with negative share price total returns of 4 and 15 per cent over one and three years, while MSCI Frontier Markets Index has been flat. The trust invests in a very risky part of the global investment universe that has significantly underperformed other markets in recent years. Frontier markets typically have lower market capitalisations and less liquid stock exchanges, making them higher risk, so are only suitable if you have a very high risk appetite and long-term investment horizon.

And the coronavirus pandemic is still having a detrimental effect on economic growth.

The trust's overweight allocations to Indonesia and the Philippines were among the largest detractors last year, as their stock markets were badly hit by the pandemic. But the trust's managers maintain their high conviction in these countries as they continue to offer significant growth and yield opportunities. 

And the trust's recent performance has been strong, with its share price up 25 per cent over the six months to 8 January. 

“Frontier markets have suffered heavily during the pandemic and this is evident in the performance of the trust in 2020, but recent performance following the vaccine news has been very strong,” says Ryan Hughes, head of active portfolios at broker AJ Bell. “This points to some interesting potential for the trust should the world get back to some element of normality, and frontier markets have strong potential given their relative underperformance of more established emerging markets. Countries such as Vietnam, Indonesia and Thailand have great long-term growth potential like many others in the region, but are volatile.”

If you are looking for long-term growth, want to diversify your emerging markets exposure and have a high enough risk appetite to tolerate volatility along the way, BlackRock Frontiers Investment Trust could add valuable diversification to your portfolio at an attractive entry point. Buy. MM