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.
We wish we could say that the trust was now cheap after a disappointing year of performance in 2018, but investors are (quite rightly in our view) keeping the faith: the premium has rebounded back towards 2% in 2019 as relative performance has improved.
The trust remains a leading product for accessing frontier markets, and its long-term track record justifies the rating and the relatively high charges, in our view.
We also think the new composition of the universe is much more rational from an investors’ point of view, and we would note that the increasing weighting that will be given to Chinese A-Shares in the coming years by MSCI means that mainstream emerging markets funds will increasingly become “China plus” funds, in the way global funds are often “US plus”. Portfolios like this offer an important way to balance such a bias and obtain access to fast growing economies which are less correlated to the global economic cycle.
|BlackRock has extensive resources deployed to these inefficient markets
||Frontier markets may suffer during the next cyclical slowdown - as they did in 2008
|The managers have a strong track record of alpha generation over the long run
||The trust is not cheap, although it is the leader in its field
|The yield is comparable to an equity income product
||Managers can go long and short stocks, which means gross gearing can be relatively high at times