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Searching for gems in the ‘Forgotten 40’

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Have the unloved frontier and small emerging markets got the potential to offer more than their larger, more popular counterparts? Co-portfolio managers Sam Vecht and Emily Fletcher give their views.

Most investment funds focus on developed markets such as the US, UK, Europe and Japan and the large emerging market countries. Within emerging markets, the largest (by market cap) eight countries represent around 85% of the benchmark (referencing the MSCI Emerging Markets index). These are the likes of Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan. We often refer to these as “everyone’s eight”, as this is where most people are invested in and focused on in emerging markets; while the other emerging countries (Egypt, Colombia, Indonesia, and Turkey, for example), are often overlooked and forgotten by investors, hence they share many characteristics similar to Frontier Markets. Together they make up a universe of around 40 markets, the “Forgotten Forty”, which we think are really interesting as they offer investors opportunities to find hidden gems – companies that are attractively priced and have compelling growth opportunities.

Key attractions

In our view, there are several good reasons to look at countries within the frontiers universe as their key characteristics can make them attractive investment propositions: low correlation (the degree in which these markets move in relation to one another and the developed markets), inefficiency and long-term growth at prices we consider offer good value for money.

The first stems from the fact that companies in frontier markets tend to have a higher ownership from domestic rather than international investors. Typically, cross ownership between markets is low. As a result, performance is predominantly driven by local, rather than international, political and macroeconomic events. These markets therefore show low correlations both to developed markets and to each other. This is attractive in a world where so many assets and markets are interconnected, offering investors the ability to spread the risk of their investments across different markets and regions. This lower correlation may have a positive effect on an investors’ experience and overall portfolio construction.  The Company has demonstrated lower volatility than the S&P 500 Index, FTSE All-Share Index and MSCI Emerging Markets Index since its inception in 2010.

Secondly, frontiers markets are less efficient than developed and the largest emerging market countries as the companies therein are less invested in and are under-researched by international institutional investors. Inefficient markets create opportunities for returns where we can add value through in-depth research. As active managers and stock pickers, we can benefit in markets where the company’s share price does not necessarily reflect its true value.

Lastly, frontier markets offer long-term growth at attractive valuations. GDP growth rates in countries in the frontiers universe tend to be higher than in developed countries. Also, low levels of invested capital in these countries, which is visible in substantial infrastructure deficits, allows for greater productivity gains from incremental investment. This creates opportunities for companies within the frontiers universe, which can benefit from these trends, to grow at a faster rate than would be sustainable in more developed markets. Furthermore, frontier markets have relatively low valuations and are often inexpensively priced, and we therefore invest in companies where we believe the risk-reward is skewed in our favour in this way.

Searching for gems

We aim to leverage an advantage through the ability to invest in countries which are fast growing and frontier in nature, show low correlation to more developed markets and are inefficient. We have been investing in these markets for more than a decade and analyse both the big-picture issues such as government policy, changes to wider economic factors, and the issues that affect individual companies, such as changes of management. Our active management of the trust means we have been able to avoid some of the challenging conditions presented by frontier markets and invest where we believe we can benefit from growth.

We have an established macro process in our team as we believe the macro matters a lot in emerging and frontier markets as assets are generally positively correlated; with bonds, currencies and equities typically moving in the same direction. We also think that the direction of travel is more important than absolute levels, hence we look for inflection points in macro indicators.

The important part is to find companies where we think that the research that we have undertaken gives us a differentiated view to market consensus. We place about half of the weight of any argument on our company research, with the remainder on wider economic and political factors that could influence performance.

It’s important to stress that our investment decisions are never made remotely by looking at the figures alone. A vital part of our investment process is visiting these markets, meeting with company owners and speaking with senior officials in government and the relevant regulatory authorities. Our global emerging markets team conducts around 4,000 meetings each year to validate the research we have already gathered.

The process is supported by a research team and regular meetings where our views are challenged and debated. We consider whether the investments are priced and how that is likely to change over the period in which we intend to stay invested in them.

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

Trust specific risks

Overseas investment will be affected by movements in currency exchange rates. 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. Frontier markets are generally more sensitive to economic and political conditions than developed and emerging markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund. There may be larger fluctuations to the value of your investment and increased risk of losing your capital. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.  

Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed. 

Important Information:

BlackRock have not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our products are suitable, please read the Key Investor Documents (KIDs) and the Annual and Half Yearly Reports available at which detail more information about the risk profiles of the investments. We recommend you seek independent professional advice prior to investing.

Non-mainstream pooled investment products status: The Company currently conducts its affairs so that its securities can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the Financial Conduct Authority (FCA) 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 FCA'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.

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. 

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