Results analysis: BlackRock Frontiers

• BlackRock Frontiers (BRFI) has reported an NAV total return of 7.7% for the year ending 30/09/2022 in sterling terms. This compares to declines of 13.2% in the MSCI Emerging Markets Index and 9.6% in the MSCI Frontier Markets Index. BRFI’s benchmark, which is unique to the trust and uninvestable, rose by 12%.
• Equities in Middle Eastern countries performed well during the year, with strong oil and gas prices boosting their economies. Many of BRFI’s largest contributors came from the region, such as EMAR Properties (+45%), the UAE real estate developer, which is the largest position in the portfolio. Fertiglobe (+117%), the nitrogen fertilizer and ammonia producer and distributor, and Air Arabia (+62%) were other strong performers in the UAE while Saudi banks also made strong returns.
• Dividends of 7.00 cents per share have been declared for the year, backed by 6.35 cents of net income and a contribution from the revenue reserve. Revenues were down from 7.09 cents in the 2021 financial year.
• The same level of dividend was paid in 2021, and the board has stated it aims to maintain it at 7.00 cents again in 2023, using reserves if necessary.
• The shares ended the period on a discount of 10.4%, having averaged 9.2% over the year. Although the board has the permissions to repurchase shares, it has not done so, believing that strong investment performance and marketing efforts are better ways to close the discount.
• Chairman of the board Audley Twiston-Davies said: “Many of the developed markets are experiencing soaring inflation and the spectre of recession. As governments and central banks grapple with the challenges brought about by the COVID-19 pandemic and the effects of the Russia-Ukraine conflict, our diverse and uncorrelated investment universe looks ever more attractive.”

Kepler View

BlackRock Frontiers’ (BRFI) strong returns in 2021 and 2022, as the mainstream emerging market index has been under pressure, illustrates the diversification potential of investing in the endogenous growth stories common in its universe. As a reminder, the trust invests in all frontier and emerging market countries, excepting the largest eight in the emerging market index. This means that, in our view, it offers a truer reflection of traditional emerging market investing, with return potential coming from catch-up development in less developed countries and their rapid GDP growth. The MSCI Emerging Market Index is now dominated by North Asian countries which have approached or reached Western levels of economic development, and are deeply intertwined with Western economic cycles.

Sam and Emily point out that the countries in their investment universe have tended to maintain greater fiscal and monetary discipline in their response to the pandemic than the key developed world countries, which means they have been less affected by inflation over 2022 and arguably have greater flexibility to respond to crises. In the Middle East, countries are also benefitting from a huge boost to their revenues thanks to high energy prices, which in turn boosts consumer spending. Sam and Emily have been looking to benefit from this in a number of ways, including by investing in a chain of female-only gyms in Saudi Arabia.

The managers argue that countries in their region will likely be amongst the first to cut rates next year, thanks to lower levels of inflation, which should be bullish for markets. In particular they expect rate cuts in Latin America, which they expect to boost economic activity and therefore benefit the banks. They also point out that countries in their region still tend to trade on a discount to their more developed peers, even after outperforming for two years. All in all, we think there are reasons to believe the region’s outperformance could continue.

BRFI’s portfolio is concentrated in three areas: post-pandemic reopening stories, energy price beneficiaries and macro recovery opportunities. Preferred countries include those in the Middle East as well as Indonesia, Malaysia, Kazakhstan and Chile. The managers are also finding stock specific opportunities in parts of Eastern Europe, which has generally been under pressure in the aftermath of the Russian invasion of Ukraine. Overall, they report finding significant value in currencies and equity markets across the investment universe and are optimistic over the long-term in the under-researched frontier markets, which should allow for compelling alpha opportunities.

In our view BRFI is attractive for those looking for long-term growth, and could be held on its own or to complement a mainstream emerging markets fund. The yield is also potentially attractive, the dividend offering an annualised yield of c. 4.2%, and BRFI may appeal to income seekers looking to diversify.

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