Fund profile: BlackRock Frontiers Investment Trust
Launched in 2010, BlackRock Frontiers Investment Trust has notched up some impressive returns during its short life. Over three years the trust has returned nearly 70 per cent, close to four times that of its sector, IT global emerging market equities, while over one year it has returned 11 per cent.
In many respects this is a remarkable recovery for a trust that in its first year of launch lost over 31 per cent on a total return basis. However, co-managers Sam Vecht and Emily Fletcher have more than proved themselves since then and the trust now boasts one of the lowest volatility scores of any BlackRock equity fund.
Vecht, an emerging and frontier markets specialist with nearly 15 years of experience investing in the region, attributes the trust's remarkable stability in no small part to the uncorrelated nature of frontier markets.
'Its low volatility is not because frontier markets aren't risky - I must stress that - it's because when you put Nigeria together with Saudi Arabia together with Argentina together with Vietnam, they don't move together.
'You may argue that the US, Japan and Brazil don't have much in common, but I can tell you when the S&P 500 is down 5 per cent, they all move down together. These [frontier] markets have their own, totally different investors,' he says.
VALUATION, VALUATION, VALUATION
At the launch of the trust some of Vecht's favoured investments included holdings in Nigerian banks like Zenith Bank, which remains a top 10 holding. Towards the end of 2012 nearly 30 per cent of BlackRock Frontiers was invested in Nigerian financials and Vecht saw his conviction pay dividends as share prices rocketed.
However, as shares reached their target price Vecht and Fletcher reduced their holdings significantly, despite the firms still trading well, and Nigerian banks now account for around 9 per cent of the trust. This disciplined approach is characteristic of Vecht who is, by any estimation, a true 'value' investor.
'Not all of these countries are going to be attractive all of the time and the principal reason is not because there is a war going on, or whatever, the biggest issue is that of valuation and it's something people forget time and time again,' explains the frank, no-nonsense manager.
Valuation was also the principal driver behind Vecht's decision to exit his holdings in Qatar and the United Arab Emirates (UAE) some three months before they were promoted from frontier to emerging market status, which would naturally exclude them from the trust.
Initially, this seemed to be the wrong move as Qatar and the UAE continued to trade upwards, however upon their promotion at the end of May they plummeted some 20 per cent with individual stocks losing up to 60 per cent. As Vecht predicted, emerging market investors were less inclined to 'pour money into grossly overvalued assets'.
Despite his focus on valuation, however, Vecht does not entirely dismiss political and structural issues within frontier markets, insisting that investors should always be 'comfortable with the macro [economic situation]' before they begin looking at 'the micro', not least due to the former's bearing on currency movements.
However, using Nigeria as an example - which currently faces a significant threat from domestic terrorist organisation Boko Haram - he insists that it is important to 'put the macro into context'.
'One has to be fully aware of the risks investing in a country like Nigeria that has violence in the north, which is a humanitarian tragedy, but is not particularly relevant for the economy as it's not a particularly developed area,' he says.
Today, Vecht and Fletcher's portfolio looks very different to three years ago with less emphasis on Nigeria and the Middle East and investments spread a little further through the frontier market universe.
While the trust's top regional weighting remains Nigeria at just over 12 per cent, its second largest weighting is now in Kuwait, which accounts for over 11 per cent of the fund.
Unsurprisingly, this is not a regional call; rather, Vecht and Fletcher have invested heavily in two Kuwaiti companies they see particular value in; Mobile Telecommunications, otherwise known as Zain, and Kuwait Food - their top holding at over 5 per cent of the trust.
Kuwait Food, also known as Americana Group, operates fast food franchises including KFC and Pizza Hut in the Middle East and North Africa. At the moment, the $4 billion (£2.38 billion) firm is reportedly being approached by US and UK-based private equity companies interested in a leveraged buy-out; a mouth-watering prospect for early adopters like Vecht and Fletcher.
'We've always liked this stock because it has a fabulous franchising footprint across the Middle East. It is rumoured that the controlling shareholder has an interest in selling, that's not why we own the stock, but it's interesting to see private equity firms interested in it,' Vecht says.
Bangladesh is a relatively new addition, a region Vecht was reluctant to buy into three years ago, again due to markets being overvalued. Since then, however, markets have halved in value and Vecht's enthusiasm on the country's growth prospects means over 7 per cent of the portfolio is now invested there.
The region is also the trust's largest overweight compared to its benchmark, the MSCI Frontier Index, of which Bangladesh accounts for less than 4 per cent.
Looking ahead, Vecht says that he expects to see the portfolio continually evolve and shift, unafraid as he and Fletcher are to make changes as when they see an opportunity.
'We started off with pretty much nothing in Bangladesh, Pakistan, Vietnam and Sri Lanka - perhaps 2 per cent between the four - whereas today they account for around 22 per cent. So these opportunities do arise.
'I would expect that we will have more in Argentina in a year's time if there is some political change there - a change in prime minister or a change in its approach to foreign investment - that would be a very interesting market.'
For more information on the BlackRock Frontiers Investment Trust see our Money Observer fund factsheet. You can also use our fund comparison tool to quickly compare it with similar funds and trusts.