BlackRock Frontiers

BRFI still looks cheap despite good gains in the recovery…

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BlackRock Frontiers
2021 Kepler Income & Growth Rated Fund

This trust has been awarded a rating by Kepler for income & growth... Find out more

BlackRock Frontiers (BRFI) invests in the smaller emerging markets and in frontier markets, countries which most investors are likely to have little exposure. Managed by Sam Vecht and Emily Fletcher, the trust is designed to offer access to the high GDP growth rates, development potential and uncorrelated markets within its investment universe.

These markets have been out of favour for some years as global flows have focussed on the US and China and on large caps – particularly technology and e-commerce. However, in the recovery rally we have seen since Q3 2020, the universe and BRFI’s portfolio have responded positively. Nevertheless, valuations are still low relative to global comparators and to history (see Portfolio section). There is also a value tilt to the universe and portfolio which has been helpful in recent months and which could continue to be so if the global recovery proceeds.

As we discuss in the Performance section, BRFI has added significant excess returns to its benchmark over the long run, with the managers demonstrating their ability to generate alpha in less liquid and therefore potentially more inefficient markets.

Despite its strong recent performance, BRFI’s shares currently trade on a discount of approximately 5%. We note that when the world economy was in better shape it was common for BRFI to trade on a premium, although performance was weaker in 2019 which led to a discount opening up prior to the current crisis.

BRFI does not target a specific dividend but, thanks to organic earnings growth from the portfolio, the shares are trading on a historical yield of 4.3%.

Kepler View

BRFI is an interesting diversifier for both growth and income investors, while the low valuations of the portfolio and the investment universe means there is the potential for exciting returns. We like the focus on the smaller emerging markets and frontier markets which we believe is a closer proposition to what emerging markets investing was in the past. The current mainstream emerging markets funds are dominated by China, South Korea and Taiwan, which are middle income countries at worst and arguably fully developed in the case of Korea, which has a higher GDP per capita than Spain. BRFI offers exposure to a diverse set of countries with high growth potential, particularly if they successfully follow China’s path, as Vietnam for one is aiming to do.

In our view BRFI stands to do well if the current recovery continues. The return of investor risk appetite should benefit its countries. The continued roll-out of vaccinations and the lifting of travel restrictions will benefit some, while others stand to do well from a recovery in global trade. On the other hand, any setbacks to the recovery could potentially see the portfolio exposed in the short term. Taking a longer term view, the low valuations seem to make an attractive entry point and, after a period in which emerging market investors have crowded into North Asia, any reversal of this trend could lead to strong returns given how far the scales have tilted in one direction.

bull bear
BRFI offers excellent diversification through access to rarely held markets A relapse in the pandemic could hit sentiment once more
The portfolio and its region are cheap, offering potentially high returns if this mean reverts The OCF is not cheap, although the trust is the leader in its field
BRFI offers a high yield from cash generative businesses Managers can go long and short on stocks with CFDs, which means effective gearing can be high at times
Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

Fund History

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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