Questor: ‘Frontier’ markets are more Covid-proof – and extremely cheap

Questor investment trust bargain: young, healthier populations offer resilience to the virus but investors have nevertheless been fleeing

Richard Evans 15 October 2020 • 5:00am

Commuters on a street during rain in Dhaka — Countries such as Bangladesh have more experience of natural disasters, so their workforces have learned to adapt Credit: Mohammad Ponir Hossain/Reuters

Western countries may have the most advanced hospitals and the best‑trained doctors but many undeveloped nations have other defences against coronavirus: young populations and low incidence of obesity and cardiovascular disease, the types of condition that tend to turn Covid-19 from mild to serious or even fatal.

These countries have been less affected by the pandemic “on every single metric” and “less than you would expect for such dense populations”, said one fund manager who invests in these regions.

Sam Vecht, co-manager of the BlackRock Frontiers investment trust, which focuses on countries one step behind those regarded as “emerging”, pointed out that some frontier nations, such as Bangladesh, were also well used to coping with regular disasters and “have a great deal of in-built flexibility in their workforces and economies”.

He said: “Some of these countries have dealt with problems in the recent past in a way we in Britain, for example, have not had to in our lifetimes.”

All this has not stopped stocks in these parts of the world trading at very low valuations.“Many of our markets continue to look very compelling at their current valuation, trading at less than nine times historic earnings and in some cases close to global financial crisis levels,” Mr Vecht and Emily Fletcher, his co-manager, told investors at the end of August.

“Despite the [post-March] bounce, the portfolio is still around the lowest valuation levels that we have seen in the last 10 years.”

The kind of stocks the trust could potentially invest in have been trading at a discount of about 40pc relative to developed market equivalents on the basis of the “price-to-book” ratio (book refers to the book value of firms’ assets) and the managers think this discount may narrow after the pandemic as investors search for growth and yield.

Analysts at Numis, the broker, said: “BlackRock Frontiers has had a tough time over the past two years, with total returns on the basis of net asset value of minus 29.3pc versus a 5.5pc fall for the MSCI Frontier Markets index. This is reflected in the fund’s discount, which has widened to 6pc. We rate the management team highly and believe this [discount] offers value.

“Additionally, the fund provides an exit opportunity at NAV less costs every five years.” The next such opportunity will be early next year, which should keep the discount in check.

Our advice is to hold, but any readers inclined to sell may want to wait a few months for that chance to do so at close to NAV.

Questor says: hold

Ticker: BRFI

Share price at close: 94.9p

Update: Brunner

In May we reported briefly that this global trust had lost its long-standing manager, Lucy Macdonald. We’ll offer a slightly longer update now.

Ms Macdonald’s departure was no reflection on her ability; instead it took place because of a restructuring at the trust’s management company, Allianz Global Investors. Her replacements are Matthew Tillett, Jeremy Kent and Marcus Morris-Eyton.

During her time at Brunner, Ms Macdonald oversaw the repayment of some of its expensive debts and a move to a more global portfolio.

Analysts at Stifel, the broker, said: “Lucy has done a good job as lead manager of the trust and has helped clean up the structure over the past few years. Matthew Tillett has worked closely with Lucy on Brunner, so he will provide continuity.”

They described him as a “sensible pair of hands” and said they envisaged a smooth handover. “We are not worried about this change,” they added.

At the time of Ms Macdonald’s departure the trust’s chairman, Carolan Dobson, said: “We believe in the benefits of delivering steady dividend growth. Prudent management of the company’s revenue account has left it in the strong position of having 28.6p of revenue reserves per share, compared to last year’s dividend of 19.98p, and the board expects to at least maintain this level of dividend in this financial year.”

In June said it expected to pay an unchanged final dividend of 6p. Following three interims since paid or declared of 4.67p each, this would give a dividend for the year of 20.01p, a small increase on the previous year’s payment. We will hold.

Questor says: hold

Ticker: BUT

Share price at close: 807p

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