BlackRock Frontiers 02 December 2020
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 Investment Trust (BRFI) invests in the smaller emerging markets and frontier markets, which the managers note are generally under-owned by most mainstream emerging markets funds but offer potentially exciting GDP growth rates and development pathways.
As a result of the pandemic, many of these countries stock markets trade on low valuations. As we discuss in the Performance section, the strong performance of BRFI’s portfolio in recent weeks indicates it may be highly sensitive to an economic recovery, potentially now in sight given positive results from various vaccine trials.
Managers Sam Vecht and Emily Fletcher believe their portfolio contains a number of exciting companies which can benefit from the secular growth trends of companies at early stages of development, typically from endogenous growth rather than imported global growth.
In a difficult period for global markets and BRFI in particular, a discount of 4.1% has opened up. We note that when the world economy was in better shape it was common for BRFI to trade on a premium. There will be an exit opportunity for investors in the next financial year too, with the details to be confirmed, which should reduce further downside risk to the discount.
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 5.8%. As we discuss in the Dividend section, we think it likely the dividend will be rebased to lower levels in the coming weeks when the annual report and accounts are published and the final dividend declared.
BRFI could be about to embark upon an exciting period of growth in our opinion. Valuations are very low, which we believe should reduce the downside risk in any temporary setbacks. Meanwhile the portfolio has leapt sharply on the positive, reflationary news of recent weeks. BRFI’s underlying markets have arguably suffered from a flight to safety and liquidity, and little technology and ecommerce representation in their stock markets. However, with GDP growth in its key markets expected by the IMF to be high next year (>7%) , the capital we would expect to see chasing cheap assets in a recovery could partly be allocated to these markets.
A weaker dollar environment, which is possible especially if a Biden administration manages to implement a large fiscal stimulus, could also benefit BRFI’s universe. We think the rise in the net exposure in recent months and elimination of the short book shows how positive the managers are on the current opportunity.
The discount that opened up this year has since partly closed. We find this unsurprising given the potential we have highlighted above and the tender offer which is likely to be made at the next AGM. This should offer an exit close to NAV in whole or in part, so further limits the downside risks at the share price level.
|BRFI offers excellent diversification through access to rarely held markets
|A relapse in the pandemic could hit sentiment once more
|The valuation of the portfolio has reached extreme lows
|The OCF is not cheap, although the trust is the leader in its field
|Most of the countries in BRFI’s universe have suffered a lower medical and economic toll from the pandemic than the rest of the world
|Managers can go long and short stocks with CFDs, which means effective gearing can be high at times