Results analysis: BlackRock Frontiers

• BlackRock Frontiers (BRFI) released its final results for the year ending 30/09/2021 last week, showing an impressive gain in NAV of 46.7% in Sterling terms versus a return of 22.1% for its benchmark. This is a bespoke index representative of the opportunity set the strategy invests in; that is frontier markets and emerging markets (EM) excluding the eight largest constituent countries in the MSCI EM Index (China, Taiwan, India, Korea, Brazil, Russia, Mexico and South Africa).
• The returns generated by BRFI also compare favourably with the mainstream MSCI EM Index which rose 13.3%, its performance being hampered by losses in the Chinese market. Despite the strong relative and absolute performance of the trust and its underlying markets, BRFI trades at a discount of 6.3% as at 01/12/2021, which compares to the average discount of 4.2% over the financial year. Historically BRFI has also spent significant periods trading at a premium.
• The board announced a final dividend of 4.25 cents per share, resulting in the trust distributing a total of 7.00 cents per share for the year, matching the 2020 pay-out. Pleasingly, BRFI’s revenue return for the year recovered to 7.09 cents per share (2020: 5.05 cents), meaning the dividend was fully covered. As at 01/12/2021, the yield of the trust was 3.9% on a historical basis.
• Chairman Audley Twiston-Davies commented: “The impressive return generated by our investment portfolio demonstrates the real opportunity available in the frontier and smaller emerging markets. We believe exposure to an asset class within which differentiated and uncorrelated markets can deliver strong growth, despite the challenging macroeconomic backdrop, continues to represent a compelling opportunity. In addition to capital growth, the company also provides its investors with an attractive yield.’

Kepler View

The commendable results published by BRFI have reinforced the strengths we highlighted in our recent detailed note on the trust: BRFI offers opportunities for growth in underappreciated markets with return streams that are less correlated with the mainstream emerging markets. The countries within BRFI’s investment universe, that is frontier markets and smaller emerging markets, were hit hard by the Coronavirus outbreak and this was reflected in the results in financial year 2020. However, the combination of economic recovery, a rebound in energy prices and improvements in global trade has resulted in a complete shift in market sentiment, with a number of markets in the Middle East, Asia and Eastern Europe recovering from the losses in 2020 and posting substantial gains on top. This contrasted starkly with mainstream emerging market strategies, which generally struggled due to the sell-off in China beginning in Q1 2021 following a regulatory crackdown on large companies seen to be engaging in potentially monopolistic practices.

Despite the strong absolute and relative performance of BRFI and its underlying markets, the trust trades at a discount of 6.3% as at 01/12/2021, which compares to the average discount of 4.2% over the financial year. We would note that historically BRFI has also spent significant periods trading at a premium.

Taking a longer term view, smaller emerging and frontier markets arguably resemble the opportunity presented to emerging market investors a generation ago, with favourable demographics, rapid economic growth and cheap valuations reflecting low allocations by global investors. BRFI’s portfolio contains stocks that should benefit from secular trends such as the expansion of nuclear power capacity (played via uranium miners), increased demand for lithium due to the electrification of cars, and increasing consumption in the world’s least developed countries. Alongside these secular tailwinds, the managers of BRFI, Sam Vecht and Emily Fletcher, have a long track record of adding value via stock picking, the patchy analyst coverage in these countries providing alpha opportunities.

As well as the potential for capital growth, BRFI offers an attractive dividend. The historical yield of 3.9% (as at 01/12/2021) 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. The recovery in portfolio earnings resulting in a fully covered dividend for the year of 7.00 cents per share (matching the 2020 pay-out) leads us to be optimistic for the outlook for the future level of dividends.

Overall, BRFI gives both growth and income investors an interesting set of options. If the cheaper valuations and long-term outlook for 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).

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