Hello and welcome to the Morningstar series, "Why Should I Invest With You?"
I'm Emma Wall and I'm joined today by Sam Vecht, Manager of the BlackRock Frontiers
Trust.
Hi, Sam.
Hi.
So, we've seen a couple of flat years from the Trust which of course followed a couple
of incredible years, I mean, 45% in one year.
It's pretty nice.
From an investors' point of view, obviously, they are going to prefer those multiple double-digit
years.
Where are we in the cycle?
Are we flat?
Are we on the growth cycle?
It's clearly been a challenging couple of years for emerging and indeed frontier markets.
I would suggest given the extent which these markets have de-rated, both in terms of the
valuations and also to the extent which some of the currencies have fallen, I think the
golden rule about investing in emerging and frontier markets is you buy when the currencies
are cheap and the markets are cheap and both of those are true today.
Of course, we said the returns have been flat, but given the backdrop, as you alluded to,
that's been pretty impressive in itself because people who have been looking at sort of investing
in a passive fund, in a tracker, have lost up to 15% in the last 18 months and more.
I mean, how have you achieved that?
Is it because of the structure of the Trust?
I think it's a couple of things.
One, it's the structure of the Trust.
We are closed-ended and that gives us the ability to invest for the long term and not
be overly obsessed with weekly and monthly performance.
But it's also been about asset allocation, the fact that we know the size of the fund
and we deliberately have a very liquid fund despite these markets being relatively illiquid
has allowed us to move from certain countries to other countries over this period of time.
It's been really important.
We've taken money out of the Middle East, put it into South Asia, put it into Argentina.
A lot of the relative performance has been a function of asset allocation.
Of course, some of it has also come through stock selection.
Looking then at asset allocation, if you look at the regional breakdown, it is very diversified,
Bangladesh, Pakistan, Argentina, as you've said to there.
Why are you picking these places?
Is it macro?
I mean, the Middle East, did you move out of there for macro reasons or is it very much
bottom-up?
It's a combination of both.
For us, what we're always looking for is countries with surpluses on the budgetary side, on the
current account side, where we can also find stocks which have decent dividend yields and
are relatively cheaply valued and are growing.
Trying to find that combination at the same time with countries where the political situation
isn't getting worse; it may not be good, but it's not getting worse, that's actually quite
challenging and that's what we spend most of our time doing.
The reason why we sold some of the Middle East apart from the oil price beginning to
go down, although it's obviously subsequently gone a lot more, was really that many of the
stocks had hit our target prices.
When stocks hit the target prices, we sell and find other interesting opportunities.
Conversely, if we think about parts of South Asia, or indeed Argentina, we could find a
whole raft of stocks that were cheaply valued, had good growth opportunities and were actually
not just growing but generating proper cash flow and cash flow is absolutely the focus.
And is that where you're seeing the opportunities for the future then?
Is it in Argentina and Southeast Asia?
It's in South Asia more than Southeast Asia.
It's in Argentina and I'm sure over the next couple of years given how much some of the
markets in the Middle East and in Africa have fallen, there will be interesting opportunities
there once again, but it's all about price of currencies and price of stock markets much
more than what appears on the news, what appears in the media.
It's really, really important.
It's not about themes.
It's about the price one pays.
There is nothing wrong with taking risks, provided it's reflected in the price.
I suppose that's no different from any investing then.
Just because it's got Frontier on the label doesn't mean that you are looking for anything
different within a company?
Absolutely not.
One has to do a lot of on-the-ground research.
We won't invest in a company unless we've met them.
Typically, we meet companies five or six times before we invest.
We won't invest in a country unless we've been there.
So, we spend a lot of time going to interesting and less interesting countries around the
world.
So there is a lot of time spent on the ground.
But once you have met the companies, you have got to really make sure that what they say
is actually true and that's why it's really important to meet not just the companies but
their customers, their suppliers and their competitors to ascertain what's really going
on.
So, investors then should put aside the sort of scaremonger which surrounds China, which
surrounds Middle East at the moment and focus then just on fundamentals?
Fundamentals are absolutely critical.
I would say when it comes to frontier markets, they are slightly different to emerging markets.
They are not very correlated, either with each other, with emerging markets or with
the developed world.
So, as emerging markets do very much move with what Yellen is saying or worries about
China and that takes all of emerging markets down or up together.
Frontier markets are far less correlated, which means one very important thing.
Although each of these markets are very volatile by themselves, Nigeria, Pakistan, Bangladesh;
when you put them all together, you end up with an investment trust that is remarkably
over the last five years less volatile than the FTSE, considerably less volatile than
the FTSE.
Now that was a surprise to many people but it's actually borne out by the data.
I suppose one last thing then.
Is there a no-go area for you at the moment?
Anywhere subject to sanctions, U.S. sanctions, UN sanctions.
At the right price, no, there are no no-go areas.
Currently, we have very limited exposure to a place like Nigeria because we think the
currency is overvalued.
And if we think that currency is going to fall 40%, 50% then you really don't want to
be in the equity market at all.
Sam, thank you very much.
Thank you.
This is Emma Wall for Morningstar.
Thank you for watching.