Index-beating growth without much AI exposure: Blackrock Frontiers

BRFI has delivered index-beating growth without much AI exposure…by Thomas McMahon

This trust has been awarded a rating by Kepler Trust Intelligence for growth… Find out more
 

Overview

 
BlackRock Frontiers (BRFI) is a truly unique proposition, investing actively in some of the fastest-growing yet almost completely overlooked markets in the world. Managers Sam Vecht and Emily Fletcher focus on frontier markets and the smaller emerging markets, the latter having been ever more marginalised in the mainstream indices by the increasingly developed Asian tech sector. They also invest in those countries yet to even win a place on the Frontiers index, which have at times contributed meaningfully to strong returns over the past five years (see Performance).

BRFI’s portfolio includes stocks being driven by domestic growth themes, with Kazakhstan, Kenya and Hungary amongst the diverse stories represented. Rapid economic development in the individual country is often behind the positioning, with the managers looking to buy into markets as they enter cyclical upswings. However, an important general theme of digitalisation is represented across the portfolio, through fintech holdings, ecommerce and leading banks. Notably, most growth drivers are unrelated to the AI trade which currently dominates emerging market as well as developed market indices.

BRFI’s board has committed to a five-yearly liquidity opportunity, and offered a 100% tender offer this spring. Only 13% of the shares were tendered, and the trust trades on a slight premium at the time of writing.
 

Kepler View

We think BRFI’s lack of exposure to the AI trade makes it look particularly attractive at the moment, given the dominance of companies related to that trend in the developed and emerging market indices. Rallying commodity prices do have some connection to AI infrastructure development, and are supporting some countries in the portfolio, but for the most part it is domestic growth and development stories, with supportive fiscal and monetary policy, that are boosting businesses BRFI owns. This exemplifies the basic proposition with BRFI: the potential for significant capital growth from markets largely uncorrelated to developed and emerging market indices and from each other. We think it is likely to be a useful diversifier to many growth portfolios.

Notably, the growth potential is available at a discount, with the universe trading c. 35% cheaper than the MSCI ACWI as of the end of March, and BRFI’s portfolio even cheaper. This discount has widened in recent years, which we think reflects the increasing concentration of markets in the mega-cap tech and latterly AI trades, a risk that needs to be borne in mind. It’s hard to find any value opportunity in BRFI’s own share price rating at present, with the shares trading on a small premium. However, the commitment to a five-yearly liquidity opportunity vastly minimises discount risk, and means that long-term investors can focus on the potential in the NAV.

Bull

• Offers diversification benefits from exposure to niche markets
• Smaller emerging and frontier markets are relatively cheap and have substantial growth potential
• Natural yield could appeal to income seekers

Bear

• Near-term risks of discount widening
• Charges are quite high, particularly when a performance fee is earned
• Political risks are high in many of the universe’s key countries

_Disclaimer

_{This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}

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