Results analysis: BlackRock Frontiers

• BlackRock Frontiers (BRFI) has reported strong results for the year ending 30/09/2023, buoyed by some exceptional returns from companies in some very different and very distant countries. The NAV total return was 14.3% in sterling (25.1% in USD) with the share price total return being 17.7% (28.8% in USD). This represents substantial outperformance of the benchmark index, which was down 3.9% in sterling, and both the MSCI Emerging Markets Index (+2.2%) and the MSCI Frontier Markets Index (-2.6%).
• BRFI invests in emerging markets, excluding the largest eight, as well as in frontier markets. This means it has no exposure to China which makes up c. 30% of Global Emerging Market indices.
• Elm, the Saudi IT company, delivered a 146% return, while Gulf International Services of Qatar rose 48.4%. Argentinian shale oil producer Vista rose 146%, while Polish bank PKO rose 80% and Hungary’s OTP Bank 103%. There were also strong contributors in Kazhakstan and Vietnam, speaking to the diversity of the underlying portfolio.
• The portfolio delivered a significantly higher revenue return of 8.38 cents per share compared to 2022’s 6.35 cents. This allowed the board to increase the dividends paid to 8 cents per share, up from 7 cents per share last year.
• After such a strong period for the trust, a performance fee was earned by the managers, taking the OCF of 1.38% up to 3.78% all included. All returns quoted are after the payment of fees.
• During the year, Sam Vecht and Emily Fletcher have been joined on the management team by Sudaif Niaz.
• The shares have traded on a discount to NAV over the year, averaging 8.4% and ending the financial year at 8.5%. Given the discount was substantially narrower than the average emerging markets trust’s, the board has not bought back shares and remains focused on performance and marketing to keep the discount in, while the trust has a tender offer scheduled for 2026.
• Chairman of the board Audley Twiston-Davies, who is stepping down following 12 years’ service, said: “As I sign off on my tenure, I am confident that the leadership of the company is in safe hands with my successor, Katrina [Hart]. I am also reassured that our portfolio managers continue to express the same infectious enthusiasm and excitement about the opportunities available in frontier markets as they did when we launched the company in 2010. I believe the company’s offering is truly unique and continues to provide our shareholders with access to dynamic markets and fast growing, exciting companies.”

Kepler View

One of BlackRock Frontiers’ (BRFI) key selling points is the potential diversification it can offer versus developed and emerging market indices by virtue of its underlying markets being less correlated. We think the results reported for 2023 are very much a ‘proof of concept’. A number of markets have benefitted from being at a different stage of the economic cycle which has meant central banks have been able to cut rates. This was true in both Chile and Hungary, for example. Meanwhile, there have been a number of disparate secular growth trends also driving companies in the portfolio, such as the domestic growth in the Middle East and the success of Kaspi in growing the ecommerce and payments industries in Kazakhstan. All this has helped deliver strong returns from multiple uncorrelated sources while many key benchmark indices have been weak. Additionally, they all seem to be trends with some runway ahead of them, which could support good performance in the coming months and years.

There is another trend that has supported many of the countries in the portfolio which we think looks very exciting over the coming years: the diversification of supply chains, often called ‘near-shoring’ or ‘re-shoring’. The key aim of this is to reduce political risk in supply chains, chiefly by limiting dependence on China. This geopolitical trend is playing into the hands of BRFI, given the exclusion of China from its investment universe. It is also benefitting countries in Latin America and in South East Asia, and BRFI’s managers report they continue to find opportunities to take advantage of this trend. For example, they note that Malaysia looks likely to be able to benefit from the diversion of semiconductor and tech packaging supply chains away from its northern competitor. We think this trend should continue to support investment in the smaller emerging markets and in frontier markets, BRFI’s investment universe, and it is a non-cyclical driver which could help produce resilient performance in a generally weak global economy.

We think BRFI really stands out in the investment trust space as having a unique investment universe and a clearly defined investment strategy designed to benefit from its strengths. It is a highly active proposition which makes full use of the investment trust structure by investing in less liquid markets and companies. It also offers a handsome yield, although this is not a formal objective and dividends may fall or rise in future.

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