Investment confidence BlackRock Frontiers goes where few other asset managers venture in the pursuit of shareholder returns: investing in companies that serve the needs of three billion of the world’s poorest people.
It’s a strategy that means the trust is shunning investment in the major emerging markets of Brazil, China, India, Mexico, Russia, South Africa, South Korea and Taiwan. The result is a listed investment company that, according to manager Sam Vecht, invests in ‘all markets and companies that most other fund managers do not look at’.
Vecht has managed the £267 million trust with Emily Fletcher since it was founded almost 13 years ago. Sudaif Niaz, who joined the investment team nine years ago, completes the line-up.
The trust’s country interests emphasize its breadth. It has stakes in 54 companies – operating in countries not known for their equity capital, such as Bangladesh, Cambodia, Chile, Colombia, Egypt, Kazakhstan and Peru.
“The common feature is that all the assets of the trust are listed on the stock exchange,” says Vecht, who has traveled in recent weeks to meet companies in Abu Dhabi (capital of the United Arab Emirates), Cambodia and Thailand. ‘As a matter of principle, we do not invest in unlisted companies. There are no fun games, just positions in companies listed on normal stock exchanges. And we are not beholden to any country.”
Because the corporate governance of many companies in these frontier markets is much lower than that of companies listed on more established stock exchanges, on-the-ground research is essential.
“Before you invest in a company, you need to talk to suppliers and customers and do due diligence,” says Vecht. ‘It’s also good to meet trade unionists and journalists to get different perspectives.’
Regardless of the forensic work Vecht and his team do – backed by BlackRock’s vast resources – there will be failures along the way.
‘Most of the companies we buy into are going in the right direction and we are getting a return on our investment. But sometimes company managers do not keep their promises,” says Vecht.
“Occasionally politics gets in the way and makes it difficult for some of the companies we have invested in to thrive. Fraud will also crop up from time to time. The key is to make sure the successes outweigh the failures.”
The trust’s overall performance shows that managers get things right more often than they get them wrong.
Over the past five years, the trust has generated a return of 25 percent, which is lower than the return of the average global emerging markets fund (32 percent). In the shorter term, the results were more impressive, with one- and three-year returns of 14 and 47 percent respectively.
Vecht is reluctant to talk about individual companies, even though the trust regularly issues monthly updates on its top ten holdings – and a list of all its investments is available via BlackRock’s website.
The latest fact sheet, issued a few days ago, includes comments that Vecht declined to provide personally – for example, about a new position at gas pipeline company OQ Gas, based in Oman.
The investments won’t be to everyone’s taste as Saudi Arabia is the trust’s largest country position.
The trust’s largest holdings include positions in commercial bank Saudi National Bank and chemical giant Saudi Basic Industries Corporation. Vecht says the country has undergone enormous social changes in the past decade.
The trust generates an annual income of 4 percent. The ongoing costs are reasonable: just under 1.4 percent per year. The exchange ID code is B3SXM83 and ticker BRFI.