BlackRock Frontiers 05 February 2025
Disclaimer
This is a non-independent marketing communication commissioned by BlackRock. 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) is a unique investment proposition, offering exposure to the equity markets in some of the world’s fastest-growing and least-covered countries. The trust invests across the emerging and frontier market universes, but excludes the eight largest emerging markets. Given the concentration of the mainstream indices, this means the trust invests heavily in countries to which most investors will have very little, if not no, exposure.
The trust has comfortably outperformed the mainstream emerging markets indices in recent years (see Performance). China’s exclusion from the investment universe has helped but, on the other hand, India is also excluded and has outperformed, so BRFI’s success has been due to good performance from some underlying countries and companies. In 2024 the trust again posted double-digit NAV gains, although in that year the MSCI Emerging Markets Index delivered a similar result.
The portfolio’s strongest performers were highly diverse, which illustrates one of the strengths of the strategy: the diversity of growth drivers in the disparate opportunity set. Over the year, the managers took profits in some strong performers and rotated into some of the smaller countries in their universe, including some that they haven’t owned for some time (see Portfolio). The managers note a number of their countries are being boosted by positive political or economic swings that could presage a rally in their equity markets.
BRFI offers a handsome yield, despite not having an official income objective. At the time of writing, the dividends declared for 2024 (the final dividend has yet to be paid) would equate to a yield of 4.9% on the share price. The Discount has recently come in a bit to 8.5%.
BRFI encapsulates what active management can be about at its best, and we think it is perfectly suited to the investment trust sector. The trust brings the weighty resources of BlackRock to bear on an under-researched investment universe. The underlying markets account for a significant proportion of the world’s population and GDP, but barely feature in the indices to which most investors benchmark themselves. There is no passive option for investing in this benchmark at all, although the managers have shown skill in adding value through country and company selection. The managers can also take short positions and use gearing to add value, offering them a full tool kit. We think the trust offers very real diversification to a global or global emerging markets benchmarked portfolio. The yield is a by-product rather than a target, so a progressive dividend cannot be taken for granted, but nonetheless we think it could serve such a function for an income investor too.
Possible tariffs by an incoming Trump administration are the main near-term issue facing these markets. If blanket tariffs were imposed, it would undoubtedly be negative. However, if the administration were to focus on China, any tariff regime would provide opportunity for the smaller emerging markets to take trade flows away from it, as they have since the first Trump administration kick-started a trade war. Perhaps more importantly though, we would highlight that the countries in BRFI’s universe are frequently benefitting from strong endogenous drivers of growth: growing labour forces, and technological or organisational efficiency that is improving from a low base. Over the long term, we think these factors will over-ride impositions of American tariffs.
Bull
- Offers diversification benefits from exposure to niche markets
- Smaller emerging and frontier markets are relatively cheap and have substantial growth potential
- High yield could appeal to income seekers
Bear
- Potential for sharp sell-offs in systemic global crises
- Charges are quite high, particularly when a performance fee is earned
- Political risks are high in many of the universe’s key countries