Fund spotlight: BlackRock Frontiers Investment Trust

by Dzmitry Lipski from interactive investor |

interactive investor's analysts give an update and view on the BlackRock Frontiers Investment Trust.

Frontier markets are the emerging markets of tomorrow, providing exciting growth opportunities for investors due to their young and dynamic demographic, rising consumption and under-penetration of goods and services. Frontier markets are also rich with resources, land and labour, which should help support long term economic growth. Countries that fall in this bracket include Argentina, Kuwait and Nigeria.

As developed countries such as the US, UK and Europe address a slowdown in economic growth, more than half of frontier market countries are experiencing an acceleration in growth. According to the International Monetary Fund (IMF), frontier GDP is expected to grow from 3.2% in 2018 to 3.5% in 2019, then 4.0% in 2020. 

It's important to remember that not all frontier markets are the same, and this is where experienced investors can step in to identify those with better demographics, stable political systems, infrastructure and legal framework. 

The fund

Sam Vecht and Emily Fletcher, managers of the BlackRock Frontiers Investment Trust (LSE:BRFC), have identified eight countries that dominate emerging market funds, the so-called Everyone's Eight, leaving a long tail of 40 markets, known as the Forgotten Forty.

Everyone's Eight (Brazil, China, India, Korea, Mexico, Russia, South Africa, and Taiwan) accounts for about 85% of global emerging market funds.

Vecht and Fletcher ignore these eight countries completely, instead focusing on finding hidden opportunities in the Forgotten Forty.

They believe that the Forgotten Forty offer significant value compared to developed markets. Indeed, some frontier markets have a market capitalisation less than that of just one single stock listed in the developed world. For example, the market capitalisation of Netflix (NASDAQ:NFLX) (currently about $160 billion) exceeds the markets of Greece and Turkey combined. We note that the GDP of these two economies totals more than $1,100 billion, while the net income of Netflix is around $1 billion.

Vecht and Fletcher employ a combination of 'top-down' macro-economic analysis and 'bottom-up' fundamental stock research to find compelling, out of favour opportunities in frontier markets. They focus on countries which are in early cycle, seeing stabilising and rising currencies and falling bond yields, such as Indonesia, Egypt and Vietnam. At company level, they are looking for organic growth in cash flows and earnings as they believe that this is ultimately the driver of share prices over time.

The pair is also supported by Blackrock's emerging markets team, consisting of more than 40 investment professionals. They place great emphasis on face-to face meetings with companies, competitors, politicians and suppliers, giving them a clear and unbiased picture of the company and its operations.

What's in it?

The portfolio usually includes between 40 and 60 stocks, with positions ranging from 1% to 5% so that each position has a significant impact on performance. It is a relatively concentrated portfolio, with the top 10 holdings making up almost 30% of the trust. Among its biggest stakes are Indonesia's Bank Mandril (3.4%), Argentina's Banco Macro (3.3%), Indonesian conglomerate Astra International (3.2%), National Medical Care (3.2) of Saudi Arabia and Vietnamese shopping-mall operator Vincom Retail (3.1%). 

The manager's focus on companies with stable cash flows had seen the portfolio grow its dividend every year since 2011, despite income not featuring in its objectives. The current yield is 4.9%.

At country level, the portfolio is highly diversified, with 22 different geographies represented. It is currently overweight Egypt and Kazakhstan and underweight Thailand and Saudi Arabia. The largest country allocations are 14.5% to Indonesia, 9.2% to United Arab Emirates with 8.8% to Vietnam and 8.8 to Egypt. 

The trust's top sector allocation is Financials at 28.6%, followed by Real Estate 14.7%, Consumer Staples 13.6% and Consumer Discretionary at 12.4%.  Sector positioning is a derivative of country positioning and stock selection, as the managers believe that country is far more important than sector in their universe. 

How does it perform?

Since inception in December 2010 to the end of June, the trust has returned 125.4% against 95.9% from the MSCI Frontier Markets Index and 90.9% for its peers, with much lower volatility.

The managers explain that the Forgotten Forty are mostly uncorrelated, which means they generally do not move together. This enables managers to avoid sharp falls by spreading investments across different countries. It’s worth noting that due to high demand the trust has tended to trade at a premium to net assets. The current premium is 2.7%.

  01/07/2018 - 30/06/2019 01/07/2017 - 30/06/2018 01/07/2016 - 30/06/2017 01/07/2015 - 30/06/2016 01/07/2014 - 30/06/2015
BlackRock Frontiers Trust -2.84 -2.03 19.76 6.77 -5.54
MSCI Frontier Markets Index 8.84 0.05 22.69 3.42 -6.42
CE Global Frontier Markets Equity Sector 0.08 2.22 21.33 8.55 -3.03

Source: Morningstar Direct as at 30th June 2019. Returns in GBP

The ii view

BlackRock Frontiers Investment Trust features on the ii Super 60 list of high-conviction investment ideas as an Emerging Markets Equities Adventurous recommendation. The trust provides exposure to exciting growth opportunities in frontier markets picked by highly experienced fund managers. The low correlation between frontier markets and developed and emerging markets means that the inclusion of a frontier markets fund within a portfolio can bring significant diversification benefits. While offering great growth potential, frontier markets are complex and carry high risks, therefore are only suitable for longer term investors who are prepared to tolerate above-average volatility. 

If you enjoyed this article, you may also like other funds picked for interactive investor's Super 60 range of high-conviction investment ideas. Click here to find out more.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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