BlackRock Frontier Markets managed to outperform its benchmark over the year to the end of September 2015, returning -12.2% on net assets against a -18.9% return on the MSCI Frontier Markets Index. Frontier Markets underperformed wider emerging markets as evidenced by a -13.6% return on the MSCI Emerging Markets Index. The return to shareholders was -17.5% (all these figures are in Sterling). The divided has been upped from 6.25 cents to 6.55 cents. In line with promises made when the company was launched, the company will hold a tender just after the AGM to allow those who want to exit the fund to do so at NAV less costs. They’ll finance the tender by creating a separate realisation pool. If there’s demand though, they’ll issue new shares as well as trying to find buyers for tendered shares in an effort to expand the fund.
There is also a plan to expand the remit to include up to 20% of the gross value of the portfolio (on an ongoing basis) in Columbia, Egypt, Peru or The Philippines, which are countries that are members of the MSCI Emerging Markets Index as at 1 December 2015 but which they believe share similar characteristics to those of less developed markets.
The Chairman says returns were helped by the portfolio managers’ decision early in the period to reduce exposure to oil exporting countries, like Nigeria, in favour of countries which would benefit from lower energy costs, including Sri Lanka, Pakistan and Bangladesh. The positioning in Pakistan was particularly timely as the team saw the ongoing turnaround in the macroeconomic environment backed by the government’s desire to privatise businesses. Additionally, they expect Pakistan to come under consideration for Emerging Market status in the coming years.
The manager’s report says BlackRock Frontier Markets benefitted from its holding in Turkmenistan focussed energy company, Dragon Oil. The company was subject to a takeover bid from its parent company, ENOC. Other holdings which were the subject of bid speculation during the year included Kuwait Foods, the operator of American fast food brands throughout the Middle East and North Africa. More recently, Cable and Wireless Communications, a London listed telecoms company with operations across the Caribbean, has been rumoured to be targeted by US Liberty Global, although no formal offer has yet been launched.
In Pakistan, domestic power producer, Hub Power, was the top performer, rising by 67% as investors were attracted to their sovereign guaranteed US Dollar return profile in an environment of
falling interest rates. Dairy company, Engro Foods, rose by 43% over the year. The company benefited from substantial margin expansion as it took advantage of falling international milk powder prices. In Bangladesh, the standout performer was confectionary producer, Olympic Industries which rose by 63% over the period. They believe the market has recognised the growth potential of
the company, which has been driven by an increase in capacity.
They go on to say that stock selection was strong in 2015, the most notable example being Belarussian IT outsourcer, EPAM Systems, which we held for the majority of the year. They rotated exposure into Luxoft in June on the belief that despite the company maintaining revenue growth rates above 25%, the valuation of EPAM was now fully reflecting this growth, selling the stock at a price 66% above where we had bought it. Holdings in Saigon Securities, a brokerage firm in Vietnam also added to returns. The first company in Vietnam to lift Foreign Ownership Restrictions under the new regulations, the stock rallied by nearly 20% from where they initiated the position as investors anticipated an increase in domestic trading volumes.
Positions in Kazakhstan had a negative impact on performance as the fall in oil price significantly impacted government revenues and export earnings forcing the Central bank to devalue the Kazakh Tenge. Halyk Bank has fallen by 45% over the period as expectations of devaluation constrained loan growth and raised concerns of loan quality deterioration. Holdings in Iraqi oil stocks DNO and Genel also negatively impacted performance as they fell by 39% and 69% respectively. Despite very low internal lifting costs, the significant impact on the Kurdistan Regional Government budget from lower oil prices restricted their ability to make payments to the International Oil Companies, putting strain on the company balance sheets.
BRFI : BlackRock Frontiers will hold tender but aims to expand overall