BlackRock Frontiers Investment Trust (BRFI) 158.5p

Market cap: £300 million

Investing in frontier markets might seem too risky for some, yet the world’s youngest economies present exciting growth opportunities for adventurous portfolio builders. When high quality, lowly valued companies with their own growth drivers and significant re-rating scope are held in a portfolio diversified by stock, geography and sector, risk is dampened down and the results can be exceptional. This is why patient investors should consider putting money to work with BlackRock Frontiers (BRFI), an investment trust whose near-7% share price discount to net asset value (NAV) presents a buying opportunity.

The £300 million market cap is managed by Sam Vecht, Emily Fletcher and Sudaif Niaz, whose extensive travels across emerging and frontier markets take them away from the well-trodden investment path in their quest for capital growth. Their differentiated approach is demonstrably working, BlackRock Frontiers being the best five and 10-year share price total return performer in the Association of Investment Companies’ (AIC) Global Emerging Markets sector. The cherry on top is a 4.4% yield from a growing dividend, although ongoing charges of 1.41% (excluding a performance fee) are a bear point, albeit justifiable given the costs and complexities of investing in far-flung developing economies.

PASSPORT TO OUTPERFORMANCE

BlackRock Frontiers seeks to deliver long-term capital growth by investing in companies domiciled or listed in, or doing the bulk of their business in, less developed countries. The frontiers universe includes any country which is neither part of the MSCI World Index of developed markets, nor one of the MSCI Emerging Markets Index’s eight largest by market cap, namely China, Brazil, India, Korea, Mexico, Russia, South Africa and Taiwan.

Shares concedes frontier markets tend to be more volatile than more established markets, are less well regulated and often impacted by political and social instability. Corruption remains an issue, as does currency risk, with recent strength in the US dollar a headwind.

And yet, frontier markets are also a terrific source of portfolio diversification, since these smaller countries are at such an early stage of economic and political development. As a result, their economies are subject to their own internal dynamics and their growth potential often depends largely on their domestic outlook, which means they can thrive independently of the wider global economy and broader stock markets.

POSITIVE OUTLOOK

BlackRock Frontiers provides shareholders access to fast growing and high-quality companies operating in a diverse range of fascinating countries that are often under researched, which means they often trade at low valuations. The managers target under-researched markets – think Vietnam, Indonesia, Turkey, Poland, Chile and Kazakhstan for example - which can help investors to diversify their sources of long-term income and growth. Their rigorous approach leads to a unique, well-diversified portfolio spread across a range of frontier markets and between 35 to 65 companies.

As Deutsche Numis explains, this approach ‘also results in a high active share, meaning that performance can deviate markedly from the index, although over time the managers have proven that they get more calls right than wrong’. In the December factsheet, BlackRock Frontiers’ managers enthused: ‘Our investment universe, in absolute and relative terms, remains under-researched and we believe this should enable compelling alpha opportunities.’

Relative to developed markets, Vecht, Fletcher and Niaz are positive on the outlook for smaller emerging and frontier markets, where they are seeing the best opportunities, and excited about the outlooks for Bangladesh, Egypt, Kenya and Pakistan, where they have initiated positions after not being invested for some time. Prospective investors are purchasing a portfolio whose top 10 holdings range from Saudi Arabia’s Al Rajhi Bank and UAE property developer Emaar Properties to Indonesia’s Bank Central Asia and Vietnamese IT services provider FPT Corp.

AIC data shows BlackRock Frontiers has delivered a share price total return of 118.7% on a decade-long view, comfortably ahead of the 82.9% from the Global Emerging Markets sector, while the trust is up 65.2% over five years versus 12% for the sector. Morningstar data shows a five-year annualised total return of 11%, ahead of the 9.2% from the Global Frontier Markets Equity category.

Results for the year to 30 September 2024 highlighted a strong period of absolute performance, with NAV total returns of 16.5% in US dollars beating the MSCI Emerging Markets ex Selected Countries Index benchmark. An under-appreciated fact is that companies in smaller emerging markets are often cash generative, but have fewer investment options, so cash is often returned to shareholders as dividends. Accordingly, BlackRock Frontiers rewarded investors with an 18.8% increase in the total dividend to 9.5 cents last year. And Deutsche Numis notes that BlackRock Frontiers is also differentiated ‘through its five yearly exit opportunity at NAV, with the next taking place in 2026’.

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