BlackRock Frontiers Investment Trust (BRFI) invests in the world’s least developed markets in pursuit of capital growth, offering a portfolio exposed to fast-growing economies with stock markets with low correlations to each other and to the other major markets.
Porfolio managers Sam Vecht and Emily Fletcher apply a combination of top-down macro-economic analysis and bottom-up fundamental stock analysis 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 managers gain access to these markets either through direct equity investment or via contracts for difference (CFDs), which allows them to gear up the trust and provides far greater flexibility, at a lower cost than traditional bank borrowings. Additionally, the mandate allows them to short stocks through CFDs . Over the past year, the portfolio’s average long exposure has been 111%, with short exposure of 6%, giving a gross exposure of 117%, and average net exposure of 105%.
BRFI has handsomely outperformed the MSCI Frontier Markets Index over the long run. However, relative performance over the past year has been more disappointing, predominately as a result of a larger position relative to the index in Argentina, and the unfortunate timing of the change of benchmark back in April 2018.
The trust now invests in the emerging and frontier markets universe, minus the eight largest countries in the emerging markets index, which usually dominate the majority of emerging market portfolios. The MSCI Frontier Markets Index has been jettisoned as being too concentrated and suffering too many changes of composition as countries were regularly promoted in and out of the Index which led to trading activity for reasons other than the attractiveness of stocks. The new index is more diversified and should be more stable in composition in the future.
BRFI offers a healthy yield of 4.2%, despite income not being an explicit objective of the managers. This is thanks to the growing earnings on underlying companies, and we would note that the trust has revenue reserves worth 45% of last year’s full dividend. The current yield is also higher than all but one of the emerging markets trusts in the sector and all but one of the global equity income trusts.
This trust is one of few options available in the open or closed-ended space that enables investors to access frontier markets, and this, plus the strong long-term performance, may explain why it has tended to trade on a premium in recent years – now at 2.5% (as at end April 2019), compared to the 7.4% discount of for the average emerging markets trust.