Complete your registration today for a chance to win £50 John Lewis vouchers in our weekly draw Enter now
David Kimberley
View profile
Updated 09 Apr 2024
Save Article Download

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by BlackRock Frontiers. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

BlackRock Frontiers (BRFI) has enjoyed a strong run of performance over the last three years, having delivered annualised NAV total returns of 13.5%, in sterling terms, through to the end of January.

In some ways that is a validation of the argument that managers Sam Vecht, Emily Fletcher, and Sudaif Niaz have been making, namely that the trust provides exposure to countries which offer high GDP growth potential and lower correlations with developed markets. This is arguably something that emerging markets no longer offer in the way they once did.

Taking a step back, one of the key attractions for emerging markets among investors is a desire to take advantage of their large-scale economic growth potential. China’s rise over the last few decades is a prime example of this, with GDP increasing more than 40x since 1990.

Companies also tend to receive less analyst coverage than those listed in developed markets. As a consequence, there is more opportunity for professional investors to gain an informational edge and identify attractively valued companies.

However, the manner in which indices are constructed means investors eager to take advantage of these sorts of opportunities would arguably be better off looking at an investment universe like BRFI’s, which includes both frontier and emerging market indices but excludes the eight largest countries, by market cap weighting, in the latter.

BRFI’s investment universe offers investors what is arguably a more compelling proposition as a result. There are a couple of reason for that. One is that China remains predominant in emerging market indices. Although it is way down from it’s high, when it exceeded 40%, it still constitutes around a quarter of the MSCI Emerging Markets Index. Given the mix of political tensions with the US and the Chinese government’s capricious attitude to large swathes of its own economy, this is not necessarily a market some investors may want to be invested in.

Another factor is that index rules mean many countries that have really ‘emerged’ beyond emerging market status continue to be included in emerging market indices. For example, Taiwan and South Korea both have developed economies and high living standards. Investors are unlikely to benefit from the sort of large-scale economic growth potential that you would associate with an emerging market as a result. And yet the two countries constitute almost 30% of the MSCI Emerging Market Index.

To top this off, these countries are also deeply interconnected with the global economy, meaning there is little they offer in the way of diversification. Taiwan’s semiconductor industry may be appealing, for example, but you are hardly diversifying away from US tech by investing in it.

BRFI’s investment universe and portfolio offers meaningful diversification in this regard, with the companies it invests in typically being far more driven by endogenous factors that are specific to the local economy.

One consequence of this has been that returns are not strongly correlated with other developed or emerging market indices. BRFI’s returns have been strong over the last three years and that has continued, thus far, into 2024.

Kaspi, a Kazakhstani company that is active in financial services and e-commerce, provides one example of why that’s been the case. The company generates all its revenue from within Kazakhstan and has seen several years of double-digit earnings growth. The company is now so predominant in its home country that it is looking to expand into the Caucuses and other central Asian countries.

It’s a similar story with some other major holdings in the BRFI portfolio. For example, Indonesian firm Bank Central Asia is currently BRFI’s second-largest holding. It has seen substantial growth in the last five years, largely fuelled by growth in the Indonesian economy. Consumer lending revenue, for example, increased by close to 15% year on year in 2023, with sales for car and personal loan products both growing by over 20%.

Indonesia is also a good example of how BRFI’s investment universe can enhance exposure to countries where there is more runway for the sort of growth that emerging market investors are typically looking for. Companies listed in the country made up 13.8% of the trust’s portfolio at the end of January, compared to only 2.0% in the MSCI Emerging Markets Index.

Another key factor that is worth considering here is the absence of China. Emerging market funds have, like the benchmark, tended to be heavily influenced by the world’s second-largest economy. As BRFI excludes China, it is not subject to the distorting effect the country can often have on emerging market fund performance. It also means that investors aren’t exposed to the risks that the country arguably poses today, whether that be due to tensions with the US or the government’s own regulatory measures.

That is not to say that the BRFI portfolio is without risks of its own. However, investors looking for ex-China exposure to emerging markets, as well as the sort of rapid GDP growth that we think of emerging markets providing, are likely to find many facets of the trust appealing.

Press continue to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.