John explains what markets BRFI invests in, the opportunity there, how the managers pick stocks for the portfolio, the kind of top-down factors to consider, how the managers implement their investment ideas, how BRFI has done compared to mainstream emerging markets, the portfolio at the moment and the outlook for dividends.
BlackRock Frontiers Investment Trust (BRFI) provides exposure to the smaller and frontier emerging markets, a niche asset class that provides diversification to more mainstream emerging markets (such as China) that investors are likely to already hold. These 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.
As discussed in the Performance section, managers Sam Vecht and Emily Fletcher have added significant long-term excess returns since the inception of BRFI, likely reflecting the good opportunities that skilled active managers can find in a niche asset class with limited analyst coverage. Recent years have been tougher, with global investors’ focus on large US and Chinese technology stocks seeing smaller emerging and frontier markets being overlooked. However, the trust has seen a return to form in 2021 driven both by good stock-picking and the rally in value sectors such as banks, oil and mining, which are prominent in BRFI’s opportunity set.
Longer term, the 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. Despite these long-term prospects, strong performance and an attractive yield, BRFI is currently trading at a wide discount relative to its history (9.5% as at 19/10/2021). As discussed under Dividend, BRFI’s historical yield of 3.9% 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.
There are several reasons to consider owning BRFI. As a small and generally overlooked niche asset class, smaller emerging and frontier markets offer active managers a broad range of opportunities to add value, and Sam and Emily have a track record of doing just that. The countries within BRFI’s investment universe are themselves potentially attractive, with their currently low economic base providing plenty of scope for growth as their economies converge with the rest of the world. This is backed by favourable demographics, a factor that will act as a headwind for many developed and emerging countries in the years to come. Additionally, from a portfolio construction perspective BRFI acts as a diversifier within an emerging markets (EM) allocation, especially with the growing dominance of China, Taiwan and Korea within EM portfolios. This 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).
As discussed under Discount, BRFI is trading at a particularly wide discount relative to its history. In our view, given the long-term drivers of smaller emerging and frontier markets’ growth and the themes being expressed in the Portfolio, this is potentially an attractive entry point.