Ian Cowie: an investment trust to hold in febrile times

How do you feel about holding assets in countries currently being attacked by hundreds of drones and ballistic missiles? 

Investors who crave a quiet life had better look away now because I am talking about a fund focused on the wilder shores of global stock markets near the epicentre of America’s ‘Operation Epic Fury’ in Iran.  

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The latter Persian Gulf country has hit back with drone and missile attacks on all six members of the Gulf Cooperation Council (GCC) - namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). 

Shares listed in those last two - Saudi and the UAE - comprise 25% of the net asset value (NAV) of BlackRock Frontiers Ord (LSE:BRFI), a £448 million investment trust that specialises in exchanges regarded as too small and/or volatile for conventional emerging markets funds. Talk about a wealth warning. No wonder BRFI’s share price slumped 8% lower this week. 

Now here’s a surprising thing; BRFI remains 20% up over the last year, having delivered eye-stretching share price total returns of 91% over five years and 166% over the last decade.  

Better still for those of us who like to be paid to be patient, it’s currently yielding 4% income, having increased its dividends by an annual average of 7.2% over the last five years. 

Beware that dividends are not guaranteed and can be cut or cancelled without notice. Even so, if the above rate of ascent could be sustained, it would double shareholders’ income in a decade. 

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Here and now, dark clouds hang over the geopolitical and macroeconomic outlook, to put it politely.  

Other observers will quite rightly focus on the human cost of renewed conflict in the Middle East but it is the business of this column to concern itself with financial factors and investment issues. 

Chief among these is the awkward fact that a fifth of the global supply of oil and liquified natural gas (LNG) used to pass through the Strait of Hormuz, a narrow strip of water between Iran to the north with Oman and the UAE to the south.  

While Iran itself is not particularly important as a producer, accounting for about 4% of global oil, its geography gives it great influence over this chokepoint through which most Saudi oil and Qatari LNG used to be exported to the rest of the world. 

At the time of writing, nearly all shipping has ceased to transit the Strait and the price of oil has spiked 14% higher, while LNG has soared 50% skyward. That’s bad news for the global economy because it will add to the price of many forms of fuel, including renewable energy where oil and gas often provide substitute power sources to keep the lights on when the sun don’t shine and the wind won’t blow. 

But, on the other hand, higher oil and LNG prices benefit suppliers, specifically Saudi and Qatar, which are respectively the second-biggest producers of oil and LNG in the world, after America.  

That should be good for BRFI and may explain why - despite all the bad news hitting the headlines - the shares continue to be priced marginally above their NAV, trading at a 0.45% premium, while the average investment trust, excluding 3i Group Ord (LSE:III, is priced at a 12% discount below NAV. 

More generally, this fund also gives access to a wide range of early stage developing economies.  

These include Indonesia, which might not feature on many investors’ shopping lists but happens to be the world’s biggest archipelagic state - it’s a nation comprised of  more than 17,000 islands - and its most populous capital city; believe it or not, Jakarta has 42 million residents. Egypt, Poland and Vietnam also feature in this fund. 

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More importantly for investors who believe energy is the economy, because we can’t keep warm and in work without it, BRFI’s seventh-biggest geographical allocation is Kazakhstan; the former Soviet state that is the world’s biggest producer of uranium. According to the World Nuclear Association, Kazakhstan produces 39% of the global supply of this radioactive metal, which is needed to power nuclear reactors - plus less peaceful purposes. 

Such an exotic array of assets, with strong medium- to long-term share price and dividend performance, might justify steep management charges of 1.42% per annum. This is not the sort of portfolio many individual investors could put together for themselves. 

It is also encouraging to see that all five of this fund’s directors have more invested in its shares than they are paid each year to sit on its board.  

Not many investment trusts can show such unanimous financial commitment from boardroom representatives, according to ‘skin in the game’ research by the stockbroker, Investec. 

All things considered, I am glad I paid 170p per share in September last year, as reported here at that time, for BRFI shares that trade at 192p as I write. Let’s hope all the bad news is in the price and there is better news to come. 

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

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