BlackRock Frontiers 19 July 2022

BlackRock Frontiers (BRFI) invests in a unique set of opportunities available in smaller emerging markets (EM) and frontier markets. Often, these smaller markets are overlooked by institutional investors that prefer larger, more established markets such as China that make up the majority of the current EM universe. With a combined population of three billion, BRFI’s investment universe offers substantial growth potential at relatively cheap valuations and remains under-invested by global investors.

Since launch, BRFI has been managed by Sam Vecht who was joined by Emily Fletcher in 2013. The trust has performed well, outperforming its benchmark, the wider EM and frontier markets and its peers since inception. As discussed in the Performance section, recent performance has also been strong, the underlying markets in BRFI’s universe performing well as sectors such as banks, oil and mining have rallied in the global environment of rising rates and persistent inflation. BRFI has navigated the Ukrainian crisis relatively well, with no direct Russian exposure as Russia falls outside its investment universe.

In the short-term, Sam and Emily think BRFI’s Portfolio section contains stocks that should be resilient in the face of persistent inflation and benefit from high commodity prices. In the long term, the portfolio is intended to benefit from the tailwind of secular growth in the world’s least developed countries. Despite strong relative performance in 2022 and an attractive yield, BRFI is currently trading at a wide discount relative to its history (11% as at 13/07/2022). As discussed under Dividend, BRFI’s historical yield of 4.1% is comparable to the sort of yields available in the UK equity income sector and could be a helpful diversifier for income investors with substantial exposure to the UK.

We think BRFI’s strong long-term performance reflects the good opportunities that skilled active managers can find in a niche asset class with limited analyst coverage. In the short-term, amidst the current global backdrop of persistent inflation, war and faltering economic growth, smaller emerging and frontier markets have proven resilient, generating strong returns as other major stock markets struggle. Modest starting valuations, strong cash flows and dividends, underlying economic recovery from the pandemic and windfalls for commodity and energy producers and local banks benefitting from rising rates have all contributed. These factors should continue to support these markets if global inflation were to persist, which Sam and Emily believe will be the case.

BRFI’s ability to post strong returns when mainstream emerging markets are struggling illustrates that the underlying endogenous growth stories of these markets (and the stock-picking opportunities) provide diversification which can hopefully smooth the return profile of an emerging market allocation over time. This gives both growth and income investors an interesting set of options. If smaller emerging and frontier markets are preferred, BRFI could be held as a core EM allocation. Alternatively, within a broader EM portfolio BRFI could be used as a diversifier to complement more benchmark-aware EM strategies or single-country funds (such as China or India funds).

BRFI is currently trading at a particularly wide Discount relative to its history. In our view, given the long-term drivers of the growth of smaller emerging and frontier markets and the capacity to perform in an inflationary environment, this is potentially an attractive entry point.