Interactive Investor

Trust Awards 2014: Emerging Markets

11th July 2014 11:02

Fiona Hamilton from interactive investor

Winner: BlackRock Frontiers

Frontier markets were slow to recover from the 2008 crisis, but have picked up strongly over the past 18 months.

Money has flowed in from active managers looking for an asset class with good demographics, exciting growth potential, generally low government and corporate debt, a low correlation to most other equity markets, and relatively low valuations.

The asset class has been boosted by passive money from exchange traded funds (ETFs) such as iShares MSCI Frontier 100. Launched in June 2012, the ETF has over $800 million (£476 million) in assets, which is a lot for an illiquid market to absorb and could cause difficulties if it is rapidly withdrawn.

BlackRock Frontiers was launched in December 2010, so this is the first time it has been eligible for our awards. It claims the trophy, outperforming the MSCI Frontier Market index over the past three years.

Managed from London by a 10-strong team headed by Sam Vecht, its portfolio includes 52 companies from 22 countries, headed by Bangladesh, Saudi Arabia, Nigeria, Romania, Pakistan, Sri Lanka and Kuwait.

"The average price/earnings ratio on the trust's holdings is around nine to 10 times forward earnings, which is not expensive," Vecht says. "That is because we consciously search out less expensive markets."

Much of BRFM's success has stemmed from its substantial weighting to UAE and Qatar. Vecht started trimming his positions several months ago, and had almost fully exited by end May.

The trust has had a difficult year. Vecht says this is partly because it cut back on UAE . Also, some energy holdings in northern Iraq disappointed, its near 4% exposure to Ukraine has been badly hit, and its Kazakhstan holdings were caught in the fallout.

Vecht warns that investors in frontier markets must be prepared for all sorts of risks, but does not feel they have been severe recently.

"However, the key consideration is what is in the price. On that basis we have been able to find good opportunities, but have been avoiding sub-Saharan Africa outside Nigeria, as valuations are high despite big macro problems."

Vecht adds: "Individual frontier markets can be very volatile. But put a range of them together in a portfolio and they are not volatile at all, because there is such a low correlation between them."

Highly commended: Advance Frontier Markets

Advance Frontier Markets, highly commended in the emerging markets category, has slightly lagged the MSCI Frontier Markets index over the past three years because it has been underweight the Gulf states, in particular the UAE and Qatar.

However, Dr Slim Feriani, who has headed the management team since the fund's launch in 2007, says he would have been uncomfortable matching the benchmark's 50% plus weighting in the Middle East.

He points out that the fund gained from being underweight in the Gulf in 2009, and this helped it match its index over the past five years. It has held up better than BlackRock Frontiers year to date, and its shares are much less demandingly rated.

Like its sister trust, Advance Developing Markets, AFMF is a fund of funds, and it has stakes in around 50 frontier market funds. Feriani works with a team of five regional specialists who are responsible for identifying best of breed emerging and frontier market funds.

The funds are often locally managed, which makes it easier for them to include small as well as large companies, and they may be open or closed-ended.

Feriani is positive about the long-term outlook for frontier markets, but cautious short term. He says last year's strong inflows pushed up valuations and some of the hotter money could move on.

He believes most developed markets are also looking expensive, which could prompt a widespread summer sell-off similar to those of previous years. The trust is therefore less than fully invested.

He says: "Political risk is the key risk in emerging markets and also corporate governance. Investors must not be too surprised by negative news flow and valuations must not go too high, as they must provide some cushion."