Launched in December 2010, with a five-year life span, the aim of the £90.4m BlackRock Frontiers Investment Trust is to achieve long-term capital growth from investment in companies operating in frontier markets.
Manager Sam Vecht notes the closed ended nature and limited life of the trust, after five years there will be a cash exit for investors, is important. “It allows us to invest with a five-year investment view rather than focusing on whether the trust trades at a premium or a discount. Actually it trades at, depending on how you look at it, a very small premium or a very small discount, whether you look at it with dividend or without dividend,” he explains.
The investment process is split into a top-down and bottom-up approach, and both of those facets are split into three parts.
The top-down process considers the political risk of countries, the macroeconomics, and interacts with the BlackRock network of teams in the fixed income, multi-asset and currency areas.
“This reflects our strong view that in these countries if there is something wrong with the politics or macroeconomics, that is far more important than the bottom-up. In bull markets we are more bottom up and in bear markets we are more top down. Although in certain countries within frontier markets the top-down dominates over bottom-up,” says Mr Vecht.
From the bottom-up approach to stock selection the three key factors for the management team are that they will not invest in a country unless they have been there and will not invest in a company until they have met the management.
The team also builds models of all the companies it invests in to consider issues such as liquidity, volatility and cost of equity, and finally it utilises BlackRock’s resources, this time on the equity side to ensure what the team thinks about the company makes sense in a broader global context.
The portfolio has remained relatively unchanged in the two years since launch, with Mr Vecht saying: “The major countries in the fund now are the major countries that we’ve had since we kicked off. So Nigeria, Qatar, Kazakhstan, Saudi Arabia, have been among the big countries since we kicked off, followed by Iraq and Panama.”
The trust returned 15.89 per cent in 2012 – outperforming the MSCI Frontier Markets return of 4.45 per cent on a share price total return basis. Since launch, however, the fund has suffered from the 31.24 per cent loss in 2011 leading to a share price return of just 0.96 per cent between December 17 2010 and March 22 2013, albeit this remains a slight improvement on the 0.51 per cent fall in the MSCI Frontier Markets index.
Recently the trust has increased its exposure to South East Asia, mainly Bangladesh and Vietnam, which now account for roughly 10 per cent of the portfolio between them compared to zero at launch. The move has been funded by a reduction in the Middle East exposure as some of the trust’s price targets were hit and one of its companies was bought out. It is also slightly leveraged, at the end of January the gross long position was 105 per cent and the gross short position was 3.5 per cent, which also helped boost the Vietnam and Bangladesh positions.
The manager claims that the higher risks of investing in these markets means the fund tries to take a diversified approach both sectorally and regionally.
“There are 193 members of the UN, roughly 20 are classed by MSCI as developed, roughly 20 are classed as emerging markets and we’re not interested in any of them. We are focused on the remaining frontier markets. We only have investments in roughly 30 of them, but that is our hunting ground,” he explains.
Frontier markets are obviously a higher risk investment. But with emerging markets starting to feel the effect of the global slowdown and drag of developed markets it is only natural new regions and countries will take their place. The combination investment approach and the clear five-year investment horizon means if investors are willing to take the rough with the smooth it could provide some decent returns in the long term.
Expert view
Ben Willis, investment manager and head of research at Whitechurch Securities, gives his verdict:
“This is a high-octane trust which invests in the extreme end of emerging markets. The long-term investment argument for these burgeoning economies is compelling, however, expect high levels of volatility. The closed-end structure provides a liquidity solution but the trust is expensive, running at a premium. Not for the faint hearted though.”
