Ian Cowie: the adventurous investment trust I’ve bought

Hopes that this week’s historic Gaza peace deal might stop conflict in the Middle East may rekindle adventurous investors’ interest in this region.

Bear in mind that it produces much of the world’s oil and liquefied natural gas (LNG), with revenues now funding a wide range of economic activities from banking to property development and solar power.

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Better still, whereas investors in emerging markets and - even less developed and more volatile frontier markets - used to have to pin everything on hopes of capital growth, some investment trusts focused on these sectors now yield inflation-busting income, too.

That’s why I’ve added a new holding to my forever fund by buying shares in BlackRock Frontiers Ord (LSE:BRFI), the £409 million fund where nearly 18% of the underlying assets are invested in Saudi Arabia and the United Arab Emirates (UAE). But they are not BRFI’s biggest single-country allocation; that title is held by Turkey, our North Atlantic Treaty Organisation (NATO) defence ally, where more than 10% of its assets are invested.

Indonesia, the world’s largest archipelagic nation, which is comprised of 17,000 islands, is next up in BRFI’s batting order, with nearly 9% of assets, followed by Poland, with just over 8%. Countries as various as Greece, Kazakhstan and Vietnam also feature in this fund that offers global exposure to the wild frontiers of investment.

If that sounds like too much excitement for you, then don’t let me dissuade you. Frontier markets are where all the usual warnings about share price volatility go to really let some steam off.

However, I was a happy small shareholder in the Gulf Investment Fund (GIF), which was wound up last year, and believe there are reasons to restore exposure to this region. To be specific, BRFI currently yields dividend income of 4.5%, which has increased by an annual average of 4.7% over the past five years, according to independent statisticians at Morningstar.

If that rate of ascent could be sustained - which is not guaranteed - it would double shareholders’ pay in just over 15 years. As someone who hopes dividends might do much of the “heavy lifting” to fund an enjoyable retirement, these things matter to me.

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Meanwhile, BRFI has been rewarded for accepting the risks inherent in a wide variety of the world’s wilder stock markets with total returns of 24%, 125% and 151% over the past year, five years and decade. Despite those impressive numbers for capital growth and income, shares in this investment trust continue to trade 3.6% below their net asset value (NAV).

The lead fund manager, Sam Vecht, has been at the helm since BRFI was launched 15 years ago, so he has real experience of this risky sector. Vecht also manages BlackRock Latin American Ord (LSE:BRLA), which yields 5.2% income and where I’ve been a shareholder for more than a decade.

BRLA, which is the last fund left standing in the “Latin America” sector, serves as a brutal reminder that high risks don’t always earn high rewards. Its total returns over the usual three periods are 21%, 64% and 105% and the shares trade at a -8.3% discount to NAV.

Income-seekers who are willing to accept the higher volatility and risks of emerging markets may diminish those risks by diversification. Global funds with decent dividend yields include JPMorgan Emerging Markets Ord (LSE:JMG) and Utilico Emerging Markets Ord (LSE:UEM), which yield 3.8% and 3.7%, while trading at discounts of 8.4% and 12% below their NAVs respectively.

The recent revival in returns may remind investors about a macro-economic reason to consider emerging markets - defined by Morgan Stanley Capital International (MSCI) as Brazil, China, India, South Korea, Mexico, Russia, South Africa and Taiwan - plus their smaller rivals in frontier markets.

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Most of these countries have debts denominated in dollars and the recent weakness of the greenback, which has fallen in value by 10% this year against a basket of other major currencies, reduces the cost of servicing those debts. Many of these countries also export commodities - such as copper and coffee, gold, iron ore and oil - which are traded in dollars, pushing up the price of these commodities.

So, the shrinking dollar is delivering a double boost to some emerging and frontiers markets. After more than a decade of lagging behind their developed rivals, these countries and funds focused on them are enjoying a period in the sun, which might have further to run. In the meantime, BRFI, BRLA, JMG and UEM - among others - pay us to be patient.

Even so, I feel I ought to emphasise the risks involved one last time. City cynics define an emerging market as a market from which it is difficult to emerge - and frontier funds might prove even wilder.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in BlackRock Frontiers (BRFI) and BlackRock Latin American (BRLA) as part of a globally diversified portfolio of investment trusts and other shares.