BlackRock Frontiers Investment Trust (BRFI) invests in smaller emerging markets and frontier markets, aiming to use a mixture of top-down and bottom-up analysis to find companies which can benefit from their superior GDP-growth rates.
The pandemic’s impact on sentiment towards BRFI’s universe has been dramatic, resulting in its portfolio now trading on a record low historical P/E of just seven times (compared to over 13 times for the MSCI Emerging Markets Index).
Managers Sam Vecht and Emily Fletcher believe there are now pockets of real value in their universe, even in such a fluid and macro-sensitive environment. They believe higher growth and higher interest rates found in many of their countries should attract foreign capital in coming years, as investors hunt abroad for returns and yield. Additionally, lower levels of external debt have provided some resilience, while cheap currencies should improve trade competitiveness, paving the way for a rebound.
BRFI does not target a specific dividend, but thanks to organic earnings growth from the portfolio, the shares are trading on a historical yield of 5.6%. As we discuss in the Dividend section, the companies the managers target are cash-generative and prioritise maintaining their dividends. However, these markets haven’t fully escaped recent dividend-cut trends. The board has made a modest cut to the interim for 2020, and a cut to BRFI’s full-year dividend is also possible.
BRFI has fallen to a 7% discount. While this is narrower than the 12% average for the AIC Global Emerging Markets sector, it is wider than recent history. Indeed, BRFI has traded on a premium for much of the past three years.
We think some smaller economies exhibit a level of flexibility and adaptability that could allow them to recover faster from the impact of COVID-19. Whatever the reasons, it seems that the developed world will come out of this crisis with much weaker economies, higher levels of debt and lower levels of growth. By contrast, frontier countries have taken less drastic action, meaning public and corporate finances are in a relatively strong state. Cheaper currencies and lower external-debt levels, along with the long-term positives of good demographics and high GDP growth create a potentially potent mixture in any recovery.
It looks to us that this is potentially a cyclical bottom for BRFI. The portfolio valuation is at record lows, on a trailing P/E almost half that of the MSCI Emerging Markets Index. Meanwhile the underlying economies seem ready to recover from the impact of the pandemic. On top of this, the wide discount relative to history adds to the attractions. In our view this could be an interesting entry point to a trust which offers access to countries which have been largely left behind in the stampede into China and into information technology.
|BRFI offers excellent diversification through access to rarely held markets||Frontier markets can suffer during global slowdowns, as they did in 2008 and more latterly in 2020|
|The valuation of the portfolio has reached extreme lows||The OCF is not cheap, although the trust is the leader in its field|
|Although dividend cuts are possible, the yield is comparable to an equity-income fund, and dividend prospects are potentially better than in the UK||Managers can go long and short stocks with CFDs, which means effective gearing can be high at times|