Hello and welcome to the Morningstar Series, Why should I invest with you? I'm Emma Wall
and here with me today is Sam Vecht, manager of the BlackRock Frontiers Trust (BRFI).
Hello, Sam.
Hello.
So what exactly is a frontier market?
That's a really good question. There are lots of different definitions as to what a frontier
market is. We typically use the MSCI definition, and just to give you some background to that,
there are about 190 members of the United Nations, 20 or so are classed by MSCI as developed;
the U.K., the U.S., we don't invest in those. About another 20 or so are classed by MSCI
as emerging; Brazil, Russia, et cetera, and again, we don't invest in those. There's about
20 or so that are classed by MSCI as frontiers. We do invest in those and there is about another
130 or so countries in the world that we can invest and that are, say, even below frontiers
and we definitely consider those, but don't obviously invest in all of them.
I mean ever since the credit crisis, there seems to have been this concern with investors
about capital preservation, and then as things have improved very much, about income, where
do frontier markets fit in to this portfolio, because they are a more risky strategy than
emerging, aren't they?
Well, that's an interesting point again. For the simple reason that, if one looks in a
simple measure, like volatility, they're actually less volatile than emerging markets, which
certainly many people don't realize, so even the individual countries are quite volatile
and one thinks of countries like an Argentina or a Bangladesh or a Nigeria, they are very
volatile. But put them all together, they don't have very high correlation. So when
Nigeria is going up, Argentina is going down and Sri Lanka maybe flat, unlike emerging
markets, where if the U.S. market is down, probably all of the emerging markets will
be down, the frontier markets aren't highly correlated.
So on the one hand, they are not very volatile. Of course, individually, they are risking
the significant risks of investing in frontier markets. It's also worth highlighting that
many frontier markets have very significant dividend yields, various historical and cultural
reasons, and so frontier markets actually yield considerably more on average than either
emerging or indeed developed markets.
Frontier markets, as you say, are those that are smaller markets and we find that with
developed markets, the stock market and the economy are not so correlated. But as you
move down that scale, that correlation becomes more entwined, certainly in some emerging
markets. Is that the case in frontier and is it a concern for you because of that?
I would actually question that supposition. Academic research has shown there is no correlation
between GDP growth and market performance. I think it's fair to say when GDP declines,
markets go down. But when GDP rises, market don't necessarily do well, and therefore,
it's a range of macroeconomic factors as well as politics one have to consider in frontier
markets; inflation, current account deficits, those are very, very significant as well as
doing a lot of bottom-up research.
To that end then because as you say, politics can be one of the factors that determine stock
markets, how concerned are you by a lot of the bad news currently in the regions that
have frontier markets in them?
There is always bad news in many parts of the world. It's an unfortunate fact that there
are horrific scenes we see on our television screens every single night. The key question
for us is what's actually priced by the market. So if bad news is already heavily in the price
then occasionally we will have investments. So we do have exposure to Iraq, for example,
at the moment. We do have exposure to Pakistan, two countries attracting pretty negative press
at the moment. The key question at any point is how much of that bad news, how much of
that political uncertainty is in the price and other countries, where people seem to
be discounting or ignoring political problems will probably stay away from those countries.
So then where are the opportunities? You've mentioned that the price is a big positive
for you. Where are you seeing those opportunities?
In frontier markets, we are seeing opportunities anywhere from Saudi Arabia, possibly entering
a collection of indices. Historically foreigners have had challenges investing there, that's
changing in the first quarter of 2015. So, an interesting technical aspect for Saudi
Arabia. We're interested in Romania, a country growing significantly for the first time in
eight or nine years. We're interested in Sri Lanka and Bangladesh and Pakistan, all the
countries sort of, of the Indian subcontinent, all for their own reasons growing up quite
nicely and within Africa, probably the only country which we're somewhat in favour of
is Nigeria.
Sam, thank you very much.
Thank you.
This is Emma Wall for Morningstar. Thank you for watching.