Fund of the Fortnight: BlackRock Frontiers
The latest: BlackRock Frontiers
For investors with a suitably high level of risk tolerance and long-term investment horizon, frontier markets can be an exciting investment opportunity.
Although the asset class is hardly new as an investment concept, it has historically been considered little more than a fringe asset class that has not been particularly easy for retail investors to access.
Slowly but surely I believe this view is changing and frontier markets are gaining prominence as viable long-term investment opportunities – albeit very high risk opportunities. In some cases they could also bring diversification benefits, as their correlation with both developed and emerging economies has been relatively low in the post-financial crisis era.
On the measure of economic development, frontier markets are those that sit a level below ’emerging markets’ and the MSCI classification recognises 32 countries as being frontier markets, with two – Qatar and the United Arab Emirates – having recently be ‘up-graded’ to emerging market status.
One of the major attractions of these economies is their continuing long-term development potential. Frontier markets are some of the fastest growing economies in the world, faster even than many of the emerging economies, and while economic growth certainly doesn’t always translate into returns for equity holders, it does create tremendous potential.
Unlike most developed economies, frontier markets typically have rapidly growing labour forces supported by positive demographics and many have significant natural resources that can be exploited. All of these could provide the fuel for continued and sustained growth in these markets which could benefit early investors in these regions.
Of course, with this significant growth potential come a lot of risks. Sadly, as has been highlighted recently in Nigeria, geopolitical and social instability remains a challenge, and financial markets tend to be much less mature than in developed or emerging economies. Liquidity conditions are generally a lot better now than they were a decade ago, but it can still be difficult to efficiently trade investment portfolios.
Therefore investors may want to consider investment through a closed-ended structure such as an investment trust where the fund manager is able to focus on managing a set pool of assets without having the additional burden of dealing with cash flows.
With this in mind, I would highlight the BlackRock Frontiers investment trust as a good potential route for investors looking to add frontier market equity exposure.
The investment trust is managed by Sam Vecht, one of the rising stars at BlackRock, and he is supported by a team of nine talented investment professionals.
Vecht’s team uses proprietary macroeconomic research as a framework to assess which frontier economies offer the most supportive and attractive investment opportunities – including whether there is sufficient liquidity to effectively execute a trade.
Following this ‘top-down’ assessment, the team carries out fundamental research in individual target companies, which involves extensive research usually including a number of on-the-ground visits.
Finally the team combine and debate their various views looking for opportunities that are being mis-priced by the market based on a set of specific factors that the team focus on (there are eight, including changing profit margins, capital discipline and changes in tax/regulatory regimes).
The result is a portfolio of 45-55 stocks that represent the team’s best ideas. The manager has a significant degree of flexibility to invest where he sees fit, and the investment trust is largely unconstrained by the benchmark – a positive attribute, since the benchmark is dominated by volatile financials as well as relatively illiquid stocks. For example, the benchmark has 58% in financials, compared to roughly 30% in the investment trust.
Frontier market equity is a very high risk asset class, but with that comes significant upside potential over the long-term. However, the composition of the index and limited liquidity in many of these regions means I would suggest investors consider putting their money in the hands of an experienced and talented active manager through a closed-ended fund rather than opting for a passive option and open-ended option. To this end, the BlackRock Frontiers investment trust is well worth taking a look at.
Ben Seager-Scott is senior research analyst at Bestinvest
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