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.
-
Which investments can I hold in a stocks and shares ISA – and which ones are banned?HMRC has a list stating which investments are allowed in ISAs, but sometimes investors, and even ISA providers, get confused by the rules. Here’s what you need to know when picking your investments.
-
Review: Andronis Minois and Andronis Arcadia – two Greek island idyllsTravel Andronis Minois on Paros and Andronis Arcadia on Santorini are two beautiful, authentic hotels on two different islands in Greece
-
Tap into investment trusts to profit from private equityOpinion The investment companies providing access to unlisted firms’ robust growth are looking cheap, says Max King
-
Out of America's shadow: Why Trump's tariff chaos may be good for non-US stocksOpinion Upending global investment and trade could benefit other countries at the expense of the US market, says Cris Sholto Heaton
-
BP's 'long, painful decline' – and why next year could be even tougherOpinion Long-suffering shareholders in oil giant BP have been pushing for change. It won’t come soon enough, says Matthew Lynn
-
Investment trusts tap the profits in exotic and obscure global marketsOpinion Peter Walls, manager of the Unicorn Mastertrust fund, highlights three investment trusts as he shares where he'd put his money
-
Two top Asia-focused investment trustsPacific Assets and Scottish Oriental are both trusts that focus on high-quality companies controlled by trustworthy families or founders
-
Falling revenues and mounting debt spell trouble for Jumia TechnologiesStruggling African e-commerce platform Jumia Technologies looks headed for the exit, says Dr Matthew Partridge.
-
Next reports £1 billion in annual profits for the first time – what's next for the retailer?Clothing retailer Next has become only the fourth member of its sector to surpass £1 billion in annual profits. What does this mean for the company's future?
-
Best of British bargains: cash in on undervalued companies in the UK stock marketOpinion Michael Field, Chief Equity Market Strategist, EMEA, Morningstar, selects three attractive UK stocks where he'd put his money
