While this may be true on an individual basis, collectively frontier markets are far more stable than those of the US, UK or Europe, says BlackRock’s Sam Vecht.
“Each of these markets is volatile,” he said. “There are great risks in investing in these individual markets, but when you build a portfolio, they don’t move together.” As FE Trustnet pointed out in a previous article, frontier markets actually protected better than developed indices in this summer’s correction, showing a rare low correlation to other assets when markets took a tumble.
Vecht (pictured) manager of the £134.4m BlackRock Frontiers investment trust, says the reason for their lower volatility is because developed markets are more driven by global investment flows.
“There’s $1trn worth of money tracking emerging market indices,” he said. “There’s only $20bn following frontier markets.”
“When the global money which drives emerging markets gets worried, investors sell out and they all go down together. But frontier markets are very different.”
Vecht says the majority of the money in frontier markets is local, such as Saudi Arabian, which means they have their own micro-universe that remains fairly insulated from global fund flows.
He highlights the stability of his own trust, which he says has only moved more than 2 per cent in a single day on two occasions since its launch – something the FTSE has done on a fairly regular basis since the credit crunch.
However, Vecht admits as more money comes into these markets, the more they are likely to move in line with other developed indices.
“As more westerners get involved in these markets, the volatility will increase,” he said.
“[Frontier markets] will gradually become more and more volatile on a three, five and 10 year view. The time you should be interested in these markets is really now because frontier markets are less correlated.”
Vecht adds this concern is still a way off and will only become a reality as more and more investors put money in frontier markets.
He adds that many of the countries in frontier markets are growing fast, such as Saudi Arabia, Bangladesh and Nigeria, offering investors the benefits of GDP growth and flows into the stockmarket. The manager says there are still good long term growth opportunities in the region because countries have current account surpluses or at least well-funded deficits unlike the western world.
Vecht’s BlackRock Frontiers trust has performed exceptionally well of late, returning 45.97 per cent since the start of the year. The MSCI Frontier Markets index gained just 19.4 per cent in comparison.
The trust has also held up over the longer term, outperforming its sector and benchmark significantly over the last 12 months.
While investors would have had to sit through a few bumps over the last three years, since the trust launched in December 2010, it has gained 16.86 per cent, beating the MSCI Frontiers index which made 2.35 per cent. Its peers have lost 0.73 per cent over the period.
Performance of fund vs sector and index since launch
Source: FE Analytics
Vecht says he currently only invests in 30 out of the 140 odd countries that fall under the frontier markets umbrella and stresses the team is very careful in the stocks they select for the portfolio.
“We will not invest in a company unless we’ve met them five or six times and we won’t invest in a country we haven’t been to,” he said.
The highest sector weighting in the portfolio is to financials, at 32.9 per cent. Vecht is also backing the growing consumer story in frontier markets, with 20.8 per cent in consumer products.
The Middle East and Africa region dominates the sector weighting in the portfolio, at more than 60 per cent.
The trust’s recent outperformance his pushed it to a wide premium of 8.8 per cent, meaning investors are paying more to get access to the trust than the value of its underlying assets.
Vecht says the trust has historically traded on a premium or a very narrow discount but the board does not plan to issue more shares in spite of what he admits is a “chunky premium.” This, he explains, is partly because the trust was started as a five year vehicle where investors can take a cash exit, if they wish, in 2016.
“Investors have a clear exit should they wish it. The discount has never been very large. We’re on a chunky premium in spite of the fact that we’ve issued shares. But we’re not going to issue more shares and we likely won’t until after the AGM in 2016,” he said.
BlackRock Frontiers currently has no gearing and is yielding 1.1 per cent.
The trust has ongoing charges of 2.14 per cent, including a performance fee.
