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BlackRock Frontiers: 'there's a lot of growth ahead of us'
BlackRock Frontiers is giving shareholders a chance to cash in their chips but manager Sam Vecht hopes they will vote to back a fund investing in Pakistan, Bangladesh and Kuwait.
As BlackRock Frontiers (BRFI ) launches a tender offer that will determine the future of the investment trust, manager Sam Vecht (pictured) can point to a surprisingly stable journey for investors who may be mulling an exit.
Against the backdrop of a woeful five years for emerging markets, the trust, which invests in the supposedly riskier 'frontier' markets such as Pakistan, Bangladesh and Kuwait, can boast a positive return.
A 6.9% share price rise over five years may not seem that impressive, but its one of only two trusts in the Association of Investment Companies' Global Emerging Markets sector not to have lost money over that period. The other, Utilico Emerging Markets (UEM ), is effectively an infrastructure trust.
That has been helped by a discount that, unlike those of some other trusts in the sector, has not fallen into double digits, thanks to the tender offer that will provide for an exit at net asset value less costs for those investors that want one.
Despite the riskiness of the markets it invests in, the trust's share price has proved remarkably sheltered from the volatility that has hit global stock markets. Since launch until 18 December last year, the shares had only fallen by more than 2% on just 13 days.
That was due to the benefits of diversification across various frontier markets, said Vecht. 'Because each of these frontier markets has its own investor base, these markets are terribly uncorrelated,' he said, speaking at Winterflood's annual investment trust conference.
Echoing the sort of comments made by smaller company fund managers in the UK, Vecht said this inefficiency created great opportunities for active managers, with frontier markets garnering even less coverage than emerging markets by analysts.
The broad stability in the trust's shares meanwhile hides a lot of activity behind the scenes. The portfolio now looks dramatically different from five years ago, with the oil-exporting Middle Eastern countries that formed the bulk of the trust at outset now making up a much smaller portion.
'At the current oil price, very few of these countries make a sensible investment destination,' he said. 'We have no problem having zero in any one country.'
There are now no Saudi Arabian and Nigerian stocks in the trust following the rout of the oil price, with both countries also falling foul of Vecht's fears over pegged currencies. 'When the thing you are selling falls 80% it is a very bad idea,' he said.
He added that, should the trust survive beyond its tender offer, he was hoping for a more exciting journey for investors over the next five years. 'We've had five years of stability and hopefully the next five years will be considerably better than that,' he said. 'It would be nice to have just six months where we don't have a crisis!'
He said that valuations were now at a 'record low', even versus beaten-up emerging markets. While the price-earnings ratio for frontier markets was approaching that of global markets at just under 16 times at the time of the trust's launch, it has now fallen to just 10 times, below the 11.8 times of emerging economies.
'It is a very long-term story and there is a lot of growth ahead of us,' he said.
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by David Kempton on May 24, 2016 at 17:15