Results analysis: BlackRock Frontiers

• BlackRock Frontiers released its final results for the year ending 30 September 2020 last week, showing a decline in its NAV of 20%, relative to a fall of 15% from the benchmark – a bespoke index which tracks the emerging and frontier markets excluding the largest eight.
• However, since the financial year end the trust has seen a sharp rise in absolute and relative performance as news of a COVID vaccine has lifted spirits, delivering NAV returns of 27.9% compared with a rise in the benchmark of 15.5% between the financial year end and 11 December 2020.
• Having traded on a consistent premium for most of its recent life the trust started 2020 on a premium of 7.2%, but by its financial year end in September had moved to a discount of -4.9%. Although the discount has narrowed slightly since, it could still be a potentially attractive entry point for those seeking exposure to this highly differentiated strategy, with its unique focus on ‘truly emerging’ markets.
• The revenue return per share for the year amounted to 5.05 cents (2019: 8.24 cents), with the Board declaring a final dividend of 4.25cents per share, totaling 7.00 cents for the year (2019:7.75cents). This represents an attractive yield of 5.8% as of the end of the reporting period.

Kepler View

The dramatic snap-back in the performance of BlackRock Frontiers since the news of a breakthrough on a vaccine for Coronavirus began to filter through underlines what could be an interesting entry point for investors seeking exposure to emerging markets, and puts the trust back on the front foot after a difficult year.

As we discuss in our detailed note on the trust, BRFI invests in ‘true’ emerging markets – ignoring the eight largest emerging economies which make up almost 90% of the average IA Global Emerging Markets fund according to Morningstar data - and investing instead in the smaller emerging markets and frontier markets, which includes countries like Indonesia, Vietnam and the Philippines.

Valuations in these countries have suffered during the flight to safety and liquidity which has accompanied the pandemic, and they have missed out on the waterfall of money which has poured into big tech and ecommerce, neither of which features heavily here.

Even as they begin to rebound valuations in smaller developing countries remain very low and we believe have the potential for room to run, particularly if the current obsession with tech and ecommerce begins to lose its sheen and growth focussed investors begin to seek pastures new.

Ordinarily, economic growth in these countries and stock market performance tends to be more endogenously driven and so less correlated to global peers. The exception is during global crises such as this one, the scale of which has seen all boats falling with the tide.

However, despite their apparent economic fragility compared to richer countries, many of the smaller developing nations have been more resilient to the pandemic. Populations in these countries are, on average, younger than those in the developed world or in the larger and better known ‘emerging’ countries which make up the bulk of most emerging market portfolios, making them more resilient to the worst effects of COVID which we now know are most potent among the elderly.

This has spared them the worst impacts of the pandemic from a public health perspective and, importantly, their inability to conjure up vast quantities of cash via debt issuance has – for once – been a blessing in disguise, meaning they have not embarked upon the immense debt spree which has been seen in Europe and the United States, and for which we will be paying for until our children are old and grey.

This combination of factors means that in our view the countries in BRFI’s portfolio are particularly sensitive to any global economic rebound whilst also, because they remain at relatively low valuations, equipped with some insulation against the downside should the recovery stumble.

A weaker dollar environment, which is possible especially if a Biden administration manages to implement a large fiscal stimulus, should 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.

Against this backdrop the current discount (-1.5%) – even though it has tightened in recent weeks – may well prove attractive as a potential entry point for some investors - given that for most of the last five years BRFI has traded on a premium to NAV.

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