Despite a strong recovery in the last 18 months, the last few years have been dismal for BlackRock Frontiers Investment Trust (LSE: BRFI). The share price is 25% below its January 2018 high. A dividend yield of 4% provides compensation and the underlying performance has been better, with the shares on a near-10% discount to net asset value (NAV). But the trust has still not fulfilled the hopes of five years ago.
Then, Emily Fletcher, co-manager, explained the investment thesis. It opts for some of the smaller, less developed countries in the world that are in neither the developed nor emerging-markets indices. This requires detailed, “on-the-ground due diligence”, as these markets are less efficient and attract scant research coverage. BRFI believes in the theory of GDP convergence, the idea that lower initial GDP will lead to higher growth rates.
Remain patient – it’s cheap
“The trust has not lived up to expectations,” says Anthony Stern of brokers Stifel. “But investors should continue to be patient.” He points out that the trust’s investment performance in sterling over five years, 34%, lags behind the MSCI Frontiers index (52%), the MSCI Emerging Markets index (56%) and the S&P 500 (98%). “Underlying earnings in frontier markets are said to be growing at 10% per annum, but in contrast to developed markets, frontier and small emerging markets have not benefited from a market rerating and so trade on just 11 times 2021 earnings.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Vietnam accounts for 29% of the MSCI Frontier index, Morocco 11% and Iceland 7%, so BRFI can be forgiven for having a broader benchmark to encourage diversification. Still, the geographic exposure of the trust looks strange: 16% of net assets in Saudi Arabia, 8.2% in Greece and 8.4% in Vietnam.
Latin America accounts for just 8.8%, with zero in Argentina – Fletcher was badly caught out by the return of the Peronists in 2019. Countries in the Association of Southeast Asian Nations (ASEAN) other than Vietnam comprise 24%, Africa 8%, eastern Europe 16% and central Asia and the Gulf the rest.
None of the trust’s ten largest equity investments account for more than 5% of the portfolio and the sector spread is broad. Financials make up 35%, materials and energy 22.6% and consumer stocks 21%. Information technology and healthcare account for just 6%, showing that opportunities in key areas of global growth are limited. Still, sectors that would be classified as mature and therefore “value” in developed markets can be high-growth in emerging markets, while BRFI’s high yield points to cash-generative companies in the portfolio.
Politics is clearly a source of instability. The news in some countries, such as Turkey and Argentina, has been so bad that investors are starting to discount change. However, change, if it is allowed to happen at all by increasingly authoritarian governments, is not necessarily for the better and improvements in countries such as Argentina tend not to last. The wealthy in these countries prefer to move their money overseas into dollars, sterling, or euros rather than invest at home. This holds back economic development and is why the theory of GDP convergence has not worked well in practice.
Things can only get better
Disillusion with the emerging-markets thesis is now so widespread that it has contaminated countries still heading in the right direction. It gives no credence to the idea that governments, elected or not, might learn from their mistakes and realise that prosperity, not ideology or nationalism, is likely to be in their best interests.
The low valuation of BRFI’s portfolio companies, its discount, the attractive yield and the contrarian appeal of this neglected corner of the market makes BRFI’s shares attractive. Investors should give the once highly regarded investment team another chance.
-
Inheritance tax reforms: government urged to rethink curbs on rural reliefsMPs want the government to delay changes to inheritance rax reliefs for farmers
-
‘I’m among the thousands of millionaires leaving the UK – the new tax rules don’t make sense ’MoneyWeek spoke to a serial entrepreneur who is leaving the UK following the abolition of the non-dom tax status
-
'Pension funds shouldn't be pushed into private equity sector'Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
A fund that looks past the short term in AsiaGrowth should remain strong, but successful managers also need to focus on governance. Here's how to find active opportunities in Asian markets.
-
Greg Abel: Warren Buffett’s heir takes the throneGreg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.
-
Can new management turn RIT Capital around?After several years of poor performance, there is growing evidence that RIT has turned the corner, says Max King
-
'As AGMs go digital, firms must offer a new form of scrutiny for shareholders'Opinion Technology has rendered big AGM meet-ups obsolete, but the board still needs to be held to account, says Matthew Lynn
-
Unilever braces for inflation amid tariff uncertainty – what does it mean for investors?Consumer-goods giant Unilever has made steady progress simplifying its operations. Will tariffs now cause turbulence?
