BlackRock Frontiers (BRFI) offers access to the fast-growing, least developed markets in the world to which most investors have little or no exposure. BRFI aims to identify those companies which can benefit from faster GDP growth than developed markets and deliver long-term capital returns. Thanks to the nature of the market and healthy earnings growth in the portfolio companies, the trust is yielding a healthy 4.5%, despite the focus on capital growth. We consider the yield and dividend cover further in the Dividend section.
Managers Sam Vecht and Emily Fletcher use a mixture of both top-down macroeconomic analysis and bottom-up fundamental stock research to build their portfolio, and they estimate that over the long term around 50% of the alpha they have generated has come from each. The process is highly flexible, with the managers able to short stocks and use cheaper derivative contracts rather than buying the cash equities themselves (useful in markets which have lower liquidity than the more developed ones).
In themselves, the markets BRFI invests in tend to display relatively low correlation to developed and emerging market indices. Given the diversification that the managers are able to achieve, the trust has tended to display relatively low volatility in the past, which may be surprising given that less developed markets are regarded as riskier.
The trust has tended to trade on a premium in recent years, but is currently trading at par.
BRFI is the leading product for investing in the least developed markets, and we believe it offers valuable diversification for most investors (who are unlikely to have much, if any, exposure to the countries in which it invests). In our view, the long-term track record justifies the premium rating and the relatively high charges. This is not just in terms of the long-term total returns, but also in terms of the low volatility that Sam and Emily have been able to provide.
BlackRock’s investment process has been well designed, we believe, with a powerful blend of quantitative and qualitative inputs which help to deal with the complex picture created by a market made up of different economies marching to the beats of their own drums. We would also note the low volatility and low correlation to emerging and developed market indices the trust has displayed in the past.
Sam and Emily tell us that the valuations in their universe remain highly attractive, and they have increased the gearing on the trust this year, reflecting their bullishness. Another key attraction of the trust is the considerable yield. Even though this is a by-product of a capital growth-focused process, it is considerable compared to most income-focused equity trusts, and we believe it is another indication of the attractive valuations in this part of the market.
|BlackRock has extensive resources deployed to these inefficient markets
||Frontier markets may suffer during the next cyclical slowdown, which they did in 2008
|The managers have a strong track record of alpha generation
||The OCF is not cheap, although the trust is the leader in its field
|The yield is comparable to an equity income fund, yet offers the prospect of capital growth
||Managers can go long and short stocks, which means gearing can be high at times