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Exploring the next frontier

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Frontier markets may appear a riskier option than more developed markets but, as Emily Fletcher explains, they can bring three key characteristics to a portfolio: Diversification, income and, perhaps surprisingly, act to lower volatility.

Frontier markets may have some of the look and feel of emerging markets but they are not simply a higher-risk, faster-growth version. They stand as a separate asset class, with distinctive characteristics and can bring something very different to a portfolio.

Frontier markets are countries at an earlier stage of economic development. These might include countries such as Bangladesh or Kenya – where GDP per capita is low but they are growing fast – or some in the Middle East, where there is considerable wealth but capital markets are less developed with access more limited. Capital markets in these countries tend to be dominated by domestic investors and are often tough to research for global investors. As such, they are overlooked by many international investors without the resources to get into the weeds.

We believe they merit greater attention. The major emerging markets can be vulnerable to the ebb and flow of international capital. Money will flow in when optimistic asset allocators are looking for higher growth and flow out when global growth slows. Frontier markets, in contrast, are influenced more by local money flows than what is happening on Wall Street. Kenyan banks care what is happening to the Kenyan economy rather than the global economy.

This means a frontier market allocation will have much less correlation to both emerging and developed markets than they will to each other. Their economies often have few connections to the global financial system. In the BlackRock Frontiers Investment Trust, we have more than 20 different geographies represented and none of these forms more than 15% of the overall portfolio[1].

A portfolio of frontier-market companies can potentially lower the overall volatility of a portfolio. This is counter-intuitive for frontier markets at an individual stock and country level, as smaller and less liquid companies generally see greater volatility. But each individual market is so different from the others that, blended together, there is lower volatility. [SW1] 

Research from independent investment trust analysts Kepler found that since launch in December 2010, the volatility of the Trust’s underlying holdings has been lower than any other emerging markets trust, the FTSE All Share and the MSCI World[2].

A third element that investors might not expect from companies operating in countries at this early stage of development is an income stream. Income is not an explicit objective of the fund and yet the underlying income for the fund is currently 3.7% [3]. It has also shown reasonable growth over time. This is a happy accident of the underlying companies in the trust, which are often extremely cash generative. Many of the companies do not have the opportunities to invest across borders and expand into new markets. They are focused on local growth. As such, from their fast-growing local operations they are piling up cash, which has nowhere to go except to be returned to shareholders.

These are the advantages of investing in frontier markets. Nevertheless, they come with their challenges. These markets often have oddities: It may be difficult for foreign investors to buy on local exchanges, there is often less information available, with limited broker research. It only suits those who are willing to roll their sleeves up.

On the BlackRock Trust, we use a mixture of top-down macroeconomic analysis and bottom-up fundamental stock research to build the portfolio. First, we have devised our own process to assess these countries’ economies, creating a “macro dashboard” that looks at the economic cycle for each country in their universe, guiding us to likely areas of interest. We prefer to be invested in countries that are early cycle, seeing stabilising and rising currencies and falling bond yields.

For the companies themselves, we like stability – predictable earnings and cashflows, organic growth and a compelling valuation. Frontier markets tend to be less well-researched than more developed markets, which means mispricing is more evident.

Currently, it is leading us to countries such as Egypt – a poster child for structural reform with the fiscal deficit closed and the current account in surplus, thanks to a boom in tourism and energy exports. The Trust owns a medical diagnostics company, currently eyeing the huge Nigerian market, and a construction company.

Vietnam is another area of interest, as a potential beneficiary of the US-China trade war. The country has already seen lots of outsourcing from China. Even unloved Argentina features, where there is huge potential after its harsh devaluation.

The Trust has recently expanded its universe to include all but the eight largest countries in the MSCI index. This retains the diversification elements – according to Morningstar data, the average emerging markets fund portfolio in the Investment Association sector is 75% invested in the largest eight countries in the MSCI EM index[4] – but creates greater stability. The MSCI Frontiers Market can change composition relatively regularly and we do not want to be forced to sell good holdings just because a country has dropped out of the index.

At a time when markets are becoming more volatile, the temptation may be to shy away from smaller, earlier stage investments but we believe this would miss the point. Frontier markets are not a high-octane version of emerging markets but can be a stabilising force in a portfolio.

For more information on this Trust and how to access the potential opportunities presented by frontier markets, please visit

Risk warnings

Capital at risk

The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

Trust specific risks

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.

Emerging Europe: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.

Frontiers: The Company invests in a number of developing emerging markets (“Frontier Markets”). Frontier Markets tend to be more volatile than more established markets and therefore present a higher degree of risk as they are less well regulated and may be affected by political and social instability and other factors.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The BlackRock Frontiers trust currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2019 BlackRock, Inc. All Rights reserved.

[1] BlackRock factsheet May 2019

[2] Kepler, BlackRock Frontiers Investment Trust plc, May 2019

[3] BlackRock, May 2019

[4] Kepler, BlackRock Frontiers Investment Trust plc, May 2019

 [SW1]Sentences re-jigged here for better flow.


At BlackRock we see investment trusts differently. The world is undergoing political, economic and demographic change. For some, change means challenges but at BlackRock we see opportunity. We have a range of 9 investment trusts, from multi-asset to specialist. We use leading systems and experts to invest in the fastest growing countries and most successful companies across the world.

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