The manager says the volatility hasn’t changed his view about Russia or emerging Europe, and compares it to the recent political problems in Turkey, which saw him buy more in the country – although he hasn’t increased his weighting to Russia and Ukraine this time. “Emerging Europe, the region as a whole is at record low valuations and has attractive dividend yields,” he said.
“People forget that emerging Europe is part of Europe and Europe has recovered recently. It’s a pretty compelling investment opportunity. It is the cheapest region and has the highest dividend yields. This is a compelling combination.”
The manager’s BlackRock Emerging Europe trust is trading on a wide discount of 12.94 per cent, which means investors are able to access it for less than the value of its underlying holdings.
If Vecht is right about the fortunes of emerging Europe, the trust could be a good way for more aggressive investors to buy in on the cheap.
While the trust has had a difficult few years, losing capital over one and three years, it has protected better than its peers and the MSCI Emerging Europe 10/40 index.
Over five years, the trust is well ahead of the index, returning 86.58 per cent, according to FE Analytics.
Performance of trust vs index over 5yrs
Source: FE Analytics
The trust has significantly lower ongoing charges than its BlackRock Frontiers counterpart, which Vecht also runs, at 1.21 per cent. BlackRock Frontiers has ongoing charges of 2.83 per cent, including a performance fee.
Vecht thinks emerging Europe is now even more attractive than frontier markets, which has a stellar year in 2013, outperforming all other indices apart from the S&P 500 with returns of 23.56 per cent.
“A lot of things we said [12 months ago] have unfolded,” he said.
Vecht says a year ago frontier markets only had a one hundreth of the capital emerging markets held under management, at roughly $10bn.
He says this amount has doubled in the last year, as frontier markets performed well, but it still makes up just one fiftieth of the amount in the mainstream emerging world.
The manager recently told FE Trustnet he expected the frontier market rally to continue throughout 2014. However, Vecht says with the number of people looking at the region, it is looking less attractive than it was at this time a year ago.
“Now, a year on, frontier markets have gone up 30 to 40 per cent. We’re now sitting in a situation where mainstream emerging market stocks look very cheap,” he said. “Now is not the time to be mega-bullish [on frontier markets].”
“The yield in frontier markets is still better and they are less volatile, but the extent to which they look more attractive has narrowed.”
Vecht is extremely cautious on sub-Saharan Africa where he says a large amount of “hot money” which has recently come into the region has driven valuations up and increased the risk of illiquidity.
He says he is finding opportunities in countries like Saudi Arabia, Romania and Sri Lanka.
Oliver Bell, manager of the T. Rowe Price Africa & Middle East fund, agrees there can be concerns around liquidity and flows in frontier markets, but he says the strong fundamentals help support an ongoing rally in the region.
“The drives of outperformance [from a year ago] have changed,” he said. “Sub-Saharan Africa has done well, but the Middle East has driven performance from June until now.”
The manager says countries in the GCC (Gulf Cooperation Council) have been completely overlooked and they’ve been a big beneficiary of rising rates and US tapering.
Bell thinks the rally in frontier markets has much further to run because he says last year’s strong run was driven by a re-rating – a recognition by global investors that fundamentals were strong and companies were attractive. He says this year is the year for real growth in the region.
“Now everyone is underestimating the growth,” he said. “Valuations aren’t giving you any reward for that. We think this can continue.”
Over the last one and three years, Vecht’s BlackRock Frontiers Investment Trust has been the best performing trust in the IT Global Emerging Markets Equities sector, with returns of 40.55 per cent over three years.
This nearly doubles the returns of its benchmark, the MSCI Frontier Markets index, which gained 21.04 per cent.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
The trust’s outperformance has driven it to a premium of 2.49 per cent, slightly lower than its one year average of 3.48 per cent. Over the last three years the trust has traded on an average discount of 1.05 per cent.
Over the last year, the MSCI Emerging Markets index has shed 11.69 per cent, while developed markets have climbed, albeit with quite a bit of volatility. The MSCI Europe, S&P 500 and FTSE All Share indices are all up roughly 10 per cent over the period.
Performance of indices over 1yr
Source: FE Analytics
Vecht says the emerging markets region also looks attractive on valuations grounds.
“The emerging world does look very exciting and interesting here. It really comes back to valuations,” he said.
Vecht says investors should look at the recent underperformance as a buy signal rather than a reason to stay away.
“The time to buy emerging markets is when currencies are cheap and markets are cheap,” he said.
“We’ve seen massive outflows [in emerging markets] which often marks the short term bottom or absolute bottom in markets.”
