Over the year to 30 September 2023, BlackRock Frontier Markets produced an NAV total return of +25.1% (in US dollars), compared to an increase in its benchmark index of +5.0%. For Sterling based shareholders, the equivalent return for the year was +14.3%, with the index returning -3.9%, representing an outperformance of 18.2%. The discount narrowed a little from 10.8% to 8.2%, so shareholders did even better, with the share price rising from $1.43 to $1.76.
The company won the Investment Week Investment Company of the Year Award 2023 – Global Emerging Markets category for the second year in a row. It also won the AJ Bell Investment Award 2023 in the Emerging Markets Equity – Active category and the CityWire Investment Trust Award 2023 – Global Emerging Markets Equities Trust.
The manager generated a performance fee of US$8.27m for the year ending 30 September 2023. As per best practice, the performance fee structure is subject to a maximum cap and a high water mark. This mechanism requires the manager to catch up any previous cumulative underperformance against the benchmark before a performance fee can be generated.
The dividend for the year is 8 cents, up from 7 cents, and this was covered by earnings of 8.38 cents.
No shares were issued or bought back during the year under review or post year end.
Consolidation opportunity?
There is an intriguing paragraph in the chairman’s statement “The board is aware of an ongoing trend of consolidation within the wealth management industry and the implications this may have on smaller investment companies given the demand for larger, more liquid investment vehicles. With net assets of £290m as at 27 November 2023, the board believes the company is in a good position in this regard. Further, the board believes the company’s strong long term performance record, relatively narrow discount and attractive dividend should position it well to act as a consolidator. As part of the board’s ongoing strategic considerations, and against the backdrop of a number of mergers amongst closed-ended investment companies in recent years, the board regularly considers possible consolidation opportunities that might enhance value for the company’s shareholders. The board will always continue to consider whether any transaction would be in shareholders’ long-term interests.”
Extract from the manager’s report
Over the 12-month period, the Company generated positive returns in a number of countries. Elm (+146%), the Saudi IT company, was the biggest contributor to relative returns over the period. The company has done well on the back of profit growth and re-rating from the digitisation theme we are seeing in the Kingdom. The Qatar-based oil services holding company Gulf International Services (+48.4%) also did well. The company’s Q2 earnings surprised on the upside and the share price was also helped by the company successfully concluding a debt restructuring deal at favourable terms with lenders.
In Argentina our off-benchmark position in energy company Vista (+146%) was amongst the top contributors at the company level. We expect growth in shale production in Argentina to continue its dramatic growth profile and Vista will remain at the centre of this. The company still believes they can nearly double production volumes from this point.
Financials exposure has benefitted the Company, primarily through our exposure to banks across CEEMEA markets. Polish bank PKO (+80%), National Bank of Greece (+90%) and Hungary’s OTP Bank (+103%) are all amongst the top contributing companies over the period. In addition to a beneficial rates environment in these markets, asset quality of the bank portfolios has been very benign, which has translated into stronger than expected earnings. Financials exposure in Kazakhstan also contributed positively, our overweight in Kaspi (+80%), the payments and e-commerce company, was a significant contributor to overall returns. This has been a long-term holding in the Fund with a proposed US listing in Q4 this year, which should hopefully lead to further value unlocking.
In Asia, Vietnamese tech conglomerate FPT Corp (+29%) did well. This business contains a fast-growing IT services business that retains a cost advantage and has been able to win new mandates in developed markets. Given its relatively small size compared to Indian and global peers, the company has a long runway for growth. Indonesian clothing retailer, Mitra Adiperkasa (+70%) did well on the back of strong results as strong like-for-like sales continued from market share gains in the apparel market in Indonesia.
While Financials exposure has benefitted the Fund more broadly, some names have lagged with Saudi National Bank (-28%) being the biggest detractor over the period. The bank made a non-core investment in Credit Suisse which had to be written off. The market has penalised the bank for poor capital allocation and the domestic corporate credit growth picture remains murky at best. However, this remains our preferred bank exposure in Saudi Arabia, as it prices in rates normalisation and the valuation is compelling at current levels. Elsewhere in the Kingdom, Saudi Telecom also fell (-9%). While earnings per share have been good, there has been no uplift in dividend which disappointed the market. We exited the position in February. Another detractor over the period was our off-benchmark holding in Nagacorp (-37%), the Cambodian integrated-gambling resort operator. The recovery of Chinese travellers to pre-covid levels has been slower than expected, but despite that, the company is still generating strong free cash flows.
BRFI : BlackRock Frontiers delivers impressive performance