BlackRock Frontiers 21 December 2022

BlackRock Frontiers (LON:BRFI) has a unique investment remit. Managers Sam Vecht and Emily Fletcher invest across the smaller emerging markets and the whole frontier market universe, as well as Saudi Arabia. With the exclusion of the largest and most widely-held markets and stocks, the trust offers a diversified portfolio of companies in largely less-developed markets, with greater runways of growth ahead of them.

Being invested in the Middle East has been lucrative over the past year and helped the trust to outperform the emerging and frontier markets indices (see Performance). Other important exposures are South East Asia, where the rapid development of Indonesia is leading the managers to add capital, and Latin America, where a combination of domestic developments and the global materials cycle have thrown up opportunities.

Sam and Emily have a huge universe to cover and the deep resources of BlackRock are essential. This allows them to work with sophisticated macroeconomic models, to draw on bottom-up stock analysis by devoted teams focussed on various regions, and to gain insight through regular visits around the world where BlackRock’s status helps them to be granted an audience. Having a keen eye for political developments is important in these markets and both Indonesia and Chile are countries of conviction where political events and reforms are boosting the case for investment.

As discussed under Dividend, BRFI has generated an attractive level of income for investors, despite the managers not targetting a yield. The trust could, therefore, potentially be a helpful diversifier for income investors. Despite strong performance in 2022 and an attractive yield, BRFI’s shares are currently trading at a 7.7% discount to NAV.

BRFI has performed well this year for shareholders in absolute terms, being a rare bright spot thanks largely to its exposure to commodity-producing countries in the Middle East, Latin America and Asia. Sam and Emily are optimistic for the near future, believing that many countries in their universe are in relatively strong fiscal positions, being unable or unwilling to take on huge amounts of debt during the pandemic, and that rate cuts are likely to come in their region before the developed world, which should boost markets.

In our view, the unique investment universe is attractive, both in terms of the growth potential and the diversification potential. The trust’s markets tend to have limited correlation to the main emerging and developed markets’ indices and, in many cases, have obvious endogenous growth drivers, such as rising populations or rapidly developing economies, which should provide the basis for long-term growth in companies that can capitalise on these factors.

Additionally, the yield continues to be an added attraction. It is true that with higher bank rates, the yields on bonds have risen and, as developed world equity markets have fallen, the yields they offer have risen too. BRFI’s 4.2% yield is not high in this context, but it is meaningful and we think attractive given the differentiated source.