Investment Trusts

Frontier markets can give you
the edge

Frontier markets are not without their challenges, yet they represent a potentially exciting investment opportunity characterised by high gross domestic products (GDPs), young, upwardly mobile populations and low levels of government debt.

Gordon Fraser, portfolio manager for frontier markets at BlackRock, takes us from Vietnam to Nigeria and Saudi Arabia as he reveals the ingredients needed to help make frontier markets an investment success.

What is a frontier market?

Essentially, these are countries that have a disproportionate number of smaller companies and it can be more challenging to move money in and out of shares than is the case with their emerging-market counterparts. Importantly, however, they still meet criteria that make them attractive for investment.

What are these criteria?

For BlackRock, there are three key characteristics of these markets that can make them an attractive investment proposition: inefficiency, low correlation and low valuations. BlackRock is one of a small number of institutions to operate a frontier market fund and it can call on an array of analytical tools, in-depth research and years of experience. When markets are dominated by institutions they become more efficient and shares trade consistently at a price that reflects their value, which makes it harder to find shares that look better value for money. But, when investors invest for themselves, with little knowledge of how other investors are operating in other markets, more inefficiencies and abnormalities emerge, benefiting the professional investor. This relative lack of institutional investment means frontier markets don’t all behave in the same way. They tend to be driven more by internal economic and political developments, which means there is low correlation with both developed markets and also other frontier countriesi. This is attractive in a world where so many assets and markets are interconnected, and helps us to better manage the risk of falling markets. So if markets are falling in one frontier country it does not mean the entire region will be affected. Last, but not least, frontier markets have low valuations and are inexpensively priced, which means we can invest in companies relatively cost-effectively.

Given the diversity of these markets, which countries look most exciting?

Vietnam is benefiting from the relocation of trade and manufacturing from China. Taiwanese, Korean, Japanese and Chinese corporates are all building capacity in the country. They are attracted by Vietnam’s skilled workforce and entrepreneurial hard-working population, and because it’s a low-cost destination. Vietnam also has an attractive current account surplus – in the first quarter of 2016 it was running at $2.6bnii – which is an enviable position to be in. Another interesting country is Nigeria. Over the years we’ve had very little exposure to it in the trust – almost 0% – but we now have approximately 3.2% of total assetsiii. There has been a clampdown on corruption under the new administration and rent is falling, which is encouraging more investment. Importantly, the currency has fallen sharply in value, which has made it much easier to export from the country and has made Nigeria more competitive.

Frontier markets are generally more sensitive to economic and political conditions than developed and emerging markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund. There may be larger fluctuations to the value of your investment and increased risk of losing your capital.

How important is good governance in the companies in which you invest?

Effective and robust oversight is very important for us, both as the manager of our clients’ assets and in helping to deliver long-term, sustainable returns. We only invest in companies we understand and that are run to the highest standards and our investment process is key to assessing a company’s governance. We spend a lot of time on the ground and we don’t just meet managers and companies; we visit factories, we meet competitors, financiers and suppliers. We get to know and understand the entire ecosystem around the company.

How do you facilitate economic growth in frontier markets into growth for investors?

GDP growth does not always translate into cash-flow growth for investors because there are a lot of potential stumbling blocks along the way. It might be governments taking a lot in tax, or corporations mismanaging their finances. We need to ensure the political regime is benign and the tax regime is fair. Also, that institutions are run well and governance is robust. Valuations are critical here. If you can find companies that allocate capital well then you may have a recipe for good longer-term returns for investors. Frontier markets can present great opportunities for active managers who are able to use their best ideas, rather than follow an index.

What does the BlackRock Frontier Trust
do differently?

BlackRock’s Frontier Markets investment trust aims to leverage an advantage through its ability to invest in countries that are not always viewed as frontier, but which exhibit similar, attractive characteristics. Saudi Arabia is one such example. We also invest in countries often classed as emerging markets, such as Egypt and Peru. BlackRock has been investing in these markets for more than a decade. The trust started in 2010, but we were investing through other investment vehicles much earlier. The team analyses both the big-picture issues such as government policy, changes to wider economic factors, and the issues that affect individual companies, such as changes of management. Our active management of the trust means we have been able to avoid some of the challenging conditions presented by frontier markets and invest where we believe we can benefit from growth. In terms of the returns in dollars from the BlackRock Frontiers Investment Trust, it returned 64% over the five years compared with the MSCI Frontier Markets Index of 25.5%iv. So not only have these markets proven their ability to deliver growth, BlackRock has demonstrated its ability to exceed it.

For more information on the BlackRock Frontier Investment Trust plc and how to access the exciting investment opportunities these relatively new markets can offer, please visit here.


iFTSE Russell, September 2014
iiTrading Economics, November 2016
iiiBlackRock, as at 30th September 2016
ivNAV dollar return, MSCI and BlackRock, as at 30th September 2016


Annual performance (%) to last quarter end (GBP)30/09/15 - 30/09/1630/09/14 - 30/09/1530/09/13 - 30/09/1430/09/12 - 30/09/1330/09/11 - 30/09/12
BlackRock Frontiers Investment Trust plc Net Asset Value Performance 27.38 -12.22 21.12 31.15 10.65
MSCI Frontier Markets Index (NR USD) 17.67 -18.86 29.91 21.41 -0.07

Past performance is not indicative of future results. It is not possible to invest directly into an index.

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