BlackRock Frontiers Investment Trust plc (LON:BRFI) has announced its annual results for the year ended 30 September 2020.
OVERVIEW AND PERFORMANCE
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
Performance record
The Company’s financial statements are presented in US Dollars. The Company’s shares are listed on the London Stock Exchange and quoted in UK Pounds Sterling. The Sterling amounts for performance returns shown below are presented for convenience. The difference in performance returns measured in US Dollars and UK Pounds Sterling reflects the movements in the exchange rate over the period.
| As at 30 September 2020 | As at 30 September 2019 | |
| US Dollar | ||
| Net assets (US$’000)1 | 305,984 | 400,820 |
| Net asset value per ordinary share (cents) | 126.85 | 166.54 |
| Ordinary share price (mid market)2 (cents) | 120.62 | 162.66 |
| ————– | ————– | |
| Sterling | ||
| Net assets (£’000)1,2 | 236,683 | 325,262 |
| Net asset value per ordinary share2 (pence) | 98.12 | 135.15 |
| Ordinary share price (mid market) (pence) | 93.30 | 132.00 |
| Discount4 | 4.9% | 2.3% |
| ======== | ======== |
Performance | For the year ended 30 September 2020 | For the year ended 30 September 2019 | Since inception3, 5 |
| US Dollar | % | % | % |
| Net asset value per share (with dividends reinvested)4 | -20.0 | -1.5 | +17.2 |
| Benchmark Index (NR)5,6 | -15.6 | +0.0 | +14.7 |
| MSCI Frontier Markets Index (NR)5,6 | -2.7 | +5.9 | +26.1 |
| MSCI Emerging Markets Index (NR)6 | +10.5 | -2.0 | +23.6 |
| Ordinary share price (with dividends reinvested)4 | -22.1 | -6.3 | +9.5 |
| ————– | ————– | ————– | |
| UK Pounds Sterling | |||
| Net asset value per share (with dividends reinvested)4 | -23.8 | +4.2 | +41.0 |
| Benchmark Index (NR)5,6 | -19.6 | +5.8 | +37.2 |
| MSCI Frontier Markets Index (NR)5,6 | -7.3 | +12.0 | +52.1 |
| MSCI Emerging Markets Index (NR)6 | +5.4 | +3.7 | +49.1 |
| Ordinary share price (with dividends reinvested)4 | -25.8 | -0.9 | +31.5 |
| ======== | ======== | ======== |
1 The change in net assets reflects shares issued/bought back in the year, dividends paid and market movements.
2 Based on an exchange rate of US$1.2928 to £1 at 30 September 2020 and US$1.2323 to £1 at 30 September 2019.
3 The Company was incorporated on 15 October 2010 and its shares were admitted to trading on the London Stock Exchange on 17 December 2010.
4 Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 30 September 2020.
5 With effect from 1 April 2018, the Benchmark Index changed to the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index. Prior to 1 April 2018, the Benchmark Index was the MSCI Frontier Markets Index. The performance returns of the Benchmark Index since inception have been blended to reflect this change.
6 Net return (NR) indices calculate the reinvestment of dividends net of withholding taxes.
Sources: BlackRock and Datastream.
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
CHAIRMAN’S STATEMENT
Dear Shareholder
OVERVIEW
During the year to 30 September 2020, your Company’s Net Asset Value per share decreased by 20.0%. Over the same period the Benchmark Index decreased by 15.6%. However, I am pleased to report that since the financial year end, and up to close of business on 8 December 2020, the Company’s NAV has increased by 27.9% compared with a rise in the Benchmark Index of 15.5% over the same period. (All performance figures are stated on a US Dollar basis with dividends reinvested).
Despite a promising start to the year, with frontier markets equities generally performing well, in March we witnessed an unprecedented peacetime global economic contraction, following the outbreak of the COVID-19 pandemic. The lockdown measures implemented by governments across the world saw severe restrictions curtailing most forms of economic activity. We also bore witness to the human costs of the pandemic as infection and mortality rates spiked. As the lockdown measures took effect, infection rates fell. However, despite this initial success there are now clear signs of a second wave of infection in certain countries, although to date frontier markets have not seen a similar resurgence in infection rates.
While the smaller emerging and frontier markets have lagged this year, our optimism for the asset class has nevertheless risen, supported by encouraging vaccine trials, which suggest progress towards a post-COVID-19 world. These markets remain underappreciated, despite showing significant economic and medical resilience throughout the pandemic, and in many cases these countries still offer investors much stronger real growth prospects at steep valuation discounts. For example, while the IMF estimates Indonesia will grow by 8.2% in 2021, the market trades at a 36% discount to its 10 year average price to book multiple. Similarly, while Vietnam is expected to grow by 7% next year, the market trades at a 38% discount on the same basis. This is in stark comparison to developed markets which are only expected to offer 4.5% growth next year but are trading at a 24.5% premium to its 10 year average price to book.
Additionally, many of these countries feature young populations who have embraced technology and are motivated to innovate, resulting in a long-term road to greater economic self-sufficiency through market development and more sustainable wealth creation. Frontier markets may have been forgotten by many, however, their sensitivity to an economic recovery in the face of improving global conditions makes them even more attractive today.
OPERATIONAL RESILIENCE
Throughout the COVID-19 outbreak the Board have been working closely with our Manager, BlackRock, and the Company’s key service providers to minimise the risk the virus poses to the health and wellbeing of all those involved with the management and administration of the Company. We have also received regular updates on the positioning and the resilience of the portfolio. I am pleased to report that the Company’s operations have not been adversely affected and that established business continuity plans have been operating effectively.
REVENUE RETURN AND DIVIDENDS
The Company’s revenue return per share for the year amounted to 5.05 cents (2019: 8.24 cents). The Directors are recommending the payment of a final dividend of 4.25 cents per ordinary share (2019: 4.75 cents) in respect of the year ended 30 September 2020. Together with the interim dividend of 2.75 cents per share (2019: 3.00 cents), this represents a total of 7.00 cents per share (2019: 7.75 cents), a decrease of 9.7% over total dividends paid for the previous year.
Subject to shareholder approval, this dividend will be paid on 12 February 2021 to shareholders on the register at close of business on 4 January 2021. The ex-dividend date will be 31 December 2020. The Company does not have a policy of actively targeting income; nevertheless, this return, which has been supported by the Company’s revenue reserves, represents an attractive yield of 5.8% (please see the glossary in the Company’s Annual Report for the year ended 30 September 2020 for the inputs to the yield calculation). Although this year has seen a significant fall in the level of revenue derived from the portfolio as a result of the impact of COVID-19, the Company nonetheless continues to provide an attractive income return, particularly given the low returns being offered by traditional sources of income.
As mentioned in my statement to shareholders in the Half-yearly Financial Report published earlier this year, the Board reviews the Company’s revenue forecast at each meeting and seeks the opinion of the portfolio managers on the anticipated levels of revenue. However, due to the uncertainty created by COVID-19 there is little clarity on the path of dividends in the countries and markets in which we invest.
In the current environment it is more difficult than usual to forecast our 2021 revenue with any certainty, but your Board anticipates that dividends for the current financial year will total 7.00 cents per ordinary share, and this level may be supported by distributable reserves if necessary.
SHARE CAPITAL
The Directors recognise the importance to investors of ensuring that the Company’s share price is as close to its underlying NAV as possible. Accordingly, the Directors monitor the share price closely and will consider the issue of shares at a premium or the repurchase at a discount to help balance demand and supply in the market. As at 30 September 2020, the Company had 241,822,801 ordinary shares in issue, including 612,283 shares held in Treasury. A total of 1,150,000 new ordinary shares were issued during the year to 30 September 2020. No further new ordinary shares were traded during the period from 1 October 2020 up to the date of this report.
The Company bought back and transferred to treasury 612,283 ordinary shares during the year to 30 September 2020. All share issuance and buy back activity undertaken during the year has been accretive to the NAV.
For the year under review, the Company’s ordinary shares have traded at an average discount to NAV of 3.2% and were trading at a discount of 3.7% on a cum-income basis at 8 December 2020, the latest practicable date prior to the issue of this report.
The Directors have been granted the authority by shareholders to buy back up to 14.99% of the Company’s issued share capital (excluding any shares held in treasury) and also to issue or sell from treasury on a non-pre-emptive basis up to 10% of the Company’s issued share capital. Both authorities expire on the conclusion of the forthcoming Annual General Meeting (AGM) to be held on Tuesday, 2 February 2021, at which time resolutions will be put to shareholders seeking a renewal of these powers. Further information can be found in the Directors’ Report contained within the Company’s Annual Report for the year ended 30 September 2020.
PERIODIC OPPORTUNITIES FOR RETURN OF CAPITAL
When the Company was launched in late 2010, the Board made a commitment that before the Company’s fifth AGM and at five yearly intervals thereafter, it would formulate and submit to shareholders proposals to provide shareholders with an opportunity to realise the value of their ordinary shares at the prevailing NAV per ordinary share less applicable costs.
Accordingly, it is proposed that all shareholders will be given the opportunity to tender their shares for repurchase by Winterflood Securities (the Company’s broker) in early 2021. To implement the tender, a separate realisation pool will be set up, the proceeds of which will be paid to tendering shareholders when the assets have been fully realised. The Directors may, at their discretion, elect to transfer only cash and near cash assets to the tender pool (instead of a pro-rata share of the Company’s assets) in order to expedite the tender process where they consider this to be in the best interests of shareholders as a whole.
The tender offer proposals will require the approval of shareholders at a general meeting which is expected to be held in February 2021. Full details of the proposals will be set out in a shareholder circular to be issued in due course. If the number of shares tendered is such that the Directors are of the view that the continuance of the Company is not in the best interests of the continuing shareholders, they may withdraw the tender offer, and in such circumstances the Company will put forward alternative proposals to shareholders. All Directors, with the exception of Mr Zok, hold shares in the Company, and no Director will exercise his or her option to exit for cash.
In connection with the above proposals, the Board will also be seeking shareholder authority at the forthcoming AGM to cancel the Company’s share premium reserve, effectively converting it into a distributable reserve. This action is being taken, in part, to ensure that the Company has sufficient distributable reserves in the event that the current distributable reserves prove insufficient to effect the tender. Further information can be found in the Directors’ Report contained within the Company’s Annual Report for the year ended 30 September 2020.
BOARD COMPOSITION
The Board consists of five independent non-executive Directors. As part of its succession plan, the Board regularly considers its composition to ensure that a suitable balance of skills, knowledge, experience, independence and diversity is achieved to enable the Board to effectively discharge its duties.
Having served on the Board since November 2010, Mr Pitts-Tucker will be retiring at the forthcoming Annual General Meeting (AGM) and will therefore cease to be a Director of the Company from its conclusion. On behalf of the Board, I would like to take this opportunity to thank Mr Pitts-Tucker for his invaluable contribution to the long-term success of the Company during his tenure. We wish him well for the future. The Board will continue to refresh its composition following the forthcoming AGM.
In accordance with the UK Corporate Governance Code, the Directors submit themselves to annual re-election and therefore all Directors will retire and stand for re-election at the forthcoming AGM. Further information on all of the Directors can be found in their biographies contained within the Company’s Annual Report for the year ended 30 September 2020.
CORPORATE REPORTING
The Board takes its governance responsibilities very seriously and follows best practice requirements as closely as possible. The revised UK Code of Corporate Governance (the UK Code) published in 2018 requires enhanced disclosure setting out how we, as Directors, have fulfilled our duties in taking into account the wider interests of stakeholders in promoting the success of the Company. As part of this reporting, and given the environmental, social and governance (ESG) issues that are faced by many companies within the Company’s Benchmark Index, we have provided a detailed report on these matters in the Strategic Report below. We have also provided more information on our Manager’s approach to shareholder engagement and voting activities.
The Association of Investment Companies (AIC) has published updates to its Code of Corporate Governance (the AIC Code) which were endorsed by the Financial Reporting Council (FRC) as being appropriate for investment companies. The 2019 AIC Code applies to accounting periods beginning on or after 1 January 2019 and the Board has fully adopted the recommendations of the 2019 AIC Code.
ANNUAL GENERAL MEETING ARRANGEMENTS
The AGM will be held at 12:00 noon on Tuesday, 2 February 2021 at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL. At the time of writing, various guidances have been issued by the UK, Scottish and Welsh governments, respectively, regarding measures to reduce the transmission of COVID-19 in the UK. These measures are, and will continue to be, subject to periodic amendment and currently impose rules on social distancing and limitations on, among other things, public gatherings.
Accordingly, in view of this guidance, the Board is changing the format of the AGM this year to follow the minimum legal requirements for an AGM. Only the formal business set out in the Notice will be considered, with no live presentation by the Investment Manager. A presentation from the Investment Manager will be made available on the Company’s website following the conclusion of the AGM. In line with this guidance, shareholders are strongly discouraged from attending the meeting and indeed entry will be refused if current UK Government guidance is unchanged. Shareholders are encouraged to check the Company’s website at www.blackrock.com/uk/brfi for updates to the AGM arrangements as changes may well be required to comply with new guidance and/or Government measures.
The Board of course welcomes questions from shareholders and, given the format and prevailing circumstances, I would ask that shareholders submit any questions they may have to the Board in advance of the AGM. The Board or the Investment Manager will respond to all questions received. Shareholders may submit questions to the Board before 29 January 2021 by email at: [email protected].
Notwithstanding these difficult circumstances, the Board looks forward to offering opportunities for shareholders to meet the portfolio managers at some safer stage in the future.
AMENDMENT OF THE ARTICLES OF ASSOCIATION
In light of the circumstances created by the outbreak of the COVID-19 pandemic, the Board is proposing to make amendments to the Articles to enable the Company to hold general meetings (wholly or partially) by electronic means and to give additional powers in respect of postponing or adjourning meetings in appropriate circumstances. The amendments are being sought in response to challenges posed by government restrictions on social interactions as a result of the COVID-19 pandemic, which have made it impossible for shareholders to attend physical general meetings. The Board also notes that the Government is seeking to implement changes to the AGM rules to allow virtual meetings, and these changes are to ensure that the Company is prepared for these changes, once implemented.
The Board’s objective in introducing these changes is to make it easier for shareholders to participate in general meetings through introducing electronic access for those not able to travel, and also to ensure appropriate security measures are in place for the protection and wellbeing of shareholders. I should make it clear that these powers would only be used if the specific circumstances or applicable law and regulation required it and the Board’s intention is to always hold a physical AGM where it is both safe and practical to do so. The safety of shareholders, the Company’s third-party service providers and the Board must of course remain paramount.
The principal changes proposed to be introduced in the Articles, and their effect, are set out in more detail in the Directors’ report contained within the Company’s Annual Report for the year ended 30 September 2020.
OUTLOOK
As we move towards the post COVID-19 world where growth looks challenged and sources of yield ever more scarce, our investment universe includes some of the fastest growing countries in the world and our portfolio continues to provide shareholders with a good source of yield.
Despite what has been a most challenging period for the Company and a global economic backdrop which remains uncertain and unpredictable, we believe there are grounds for optimism. Governments and central banks across the globe have responded to the economic impact of the pandemic with unprecedented fiscal and monetary stimulus, and we have seen many markets rally in response. In addition, the diagnosis and treatment of the COVID-19 virus has developed significantly since the initial outbreak. More recently, several vaccines have reached a stage where they may be able to be deployed in the near future, providing hope for a return to some form of normality, although the challenge of distributing and administering such a vaccine should not be underestimated.
The portfolio managers believe that the indiscriminate sell-off seen at the start of the year has in many cases been excessive, creating distinct value opportunities in smaller frontier markets, which they have selectively been taking advantage of. In fact, many of these markets had already de-rated significantly in recent years and valuations are, in many cases, the lowest seen in a decade.
As you will read in their report, the portfolio is also exposed to several key trends such as de-carbonisation, urbanisation and emerging global wealth. We believe that these themes are likely to dominate the investment climate for years to come and should provide numerous opportunities for the medium to long term investor. In summary, we believe that frontier markets remain an exciting and dynamic asset class, offering great prospects for the medium and long term investor, and it is this, coupled with the depth of the portfolio managers’ frontier market expertise and BlackRock’s overall insight and resources, that offers shareholders real opportunity in the future.
Finally, on behalf of the Board I would like to thank shareholders for their support as we reach our tenth anniversary.
AUDLEY TWISTON-DAVIES
Chairman
10 December 2020
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
INVESTMENT MANAGER’S REPORT
OVERVIEW
It seems in the distant past, but equity markets ended 2019 on a high note, benefitting from an improving demand outlook, abating US-China tensions, as well as a resumption of easy monetary conditions led by the US Federal Reserve. Emerging and frontier market performance was no exception, further supported by US Dollar weakness. With expectations that improving liquidity would help drive activity into 2020, the Company was positioned for an expansionary environment, overweight select industrials and cyclical areas such as materials and consumer discretionary sectors.
As is now well known, the growing concerns around COVID-19 triggered a sharp sell-off across all risk assets in February and March 2020. Our markets were particularly impacted with Colombia, Greece and Indonesia respectively falling -49.7%, -45.2% and -39.7% in the first quarter of 2020 alone.
Subsequently, the combination of easing of lock downs, large scale fiscal stimulus and the loosening of monetary conditions in the world’s three major liquidity centres – the US, Europe and China – has led to the emergence of a global economic rebound. Equity markets have anticipated this recovery to the extent that as at 30 September 2020, the S&P 500 was actually up 4% year to date. However, investor caution has continued to weigh on frontier markets. The MSCI Emerging Markets Index is up 10.5% (in US Dollar terms with dividends reinvested) over the past twelve months but is showing extreme divergence in performance. The larger North Asian markets – China, Korea, and Taiwan – where economies have almost fully reopened, have all posted positive double-digit returns, while all other markets are in the red, some deeply so. With market performance in the smaller markets significantly lagging, despite material improvements in economic conditions, we believe the current situation presents a unique opportunity for investors to access some of the world’s fastest growing economies at some of the cheapest valuations we’ve seen in the past decade.
PERFORMANCE OVERVIEW
During the year ended 30 September 2020, the Company’s NAV returned -20.0%1 versus its Benchmark Index which returned -15.6%2. Over this time period, the MSCI Emerging Markets Index gained 10.5% and the MSCI Frontier Markets Index was down 2.7%. Since inception the Company returned +17.2%1, compared to a +14.7%2 return of its Benchmark Index and a +26.1% return of the MSCI Frontier Market Index, while the MSCI Emerging Markets Index returned +23.6% (all performance returns are in US Dollar terms with dividends reinvested).
Our decision early in the year, before the dangers of COVID-19 were widely appreciated, to reduce risk in the portfolio, bringing both the Company’s net exposure and beta down, proved to be correct. We reduced net exposure from a high of 110% in mid-February to 96% by early March, somewhat constrained by available liquidity from reducing the exposure further. This was a prime example of the benefits for the Company of being able to short, where the addition of short positions in liquid names allowed us to reduce the net exposure quickly. However, with the benefit of hindsight we should have been much more aggressive in these actions.
As is always the case with a sharp sell-off, there was a lack of discrimination shown by investors towards the stocks perceived as COVID-19 losers and we were able to use this opportunity to buy a number of high quality industrials where we felt that valuations looked extremely attractive. One such example was Wizz Air, thought to be the lowest cost carrier globally. Wizz Air entered this crisis with more than US$2bn of cash on its balance sheet, and so we expect it to be positioned to take substantial market share from the many flag carriers who find themselves currently in very precarious positions. Taking advantage of a number of opportunities such as this, net exposure had increased to around 106% by the start of June.
With frontier markets yet to see the rebound of more developed markets, performance has been disappointing, down 15.6% for the year. There is, as yet, no anticipation of recovery priced in, with 11 markets still down more than 20% over the last twelve months. Despite the action taken to contain net exposure as described above, relative performance was dampened with the Company’s NAV falling by 20.0%. Given our constructive early year positioning, this relative performance was to be expected. However, whilst relative positioning has been costly this year, we believe it sets us up very nicely for 2021 as those markets return to drivers of performance. Added to this is the unprecedented monetary expansion in the US and record low global interest rates which are likely to drive investors hunting for yield into emerging markets.
Our positive view on fast growing economies, Indonesia and the Philippines, was among the largest detractors. While we did see some recovery from March lows, both markets remain considerably lower than where we started the year. We note the better than expected remittance trends in the Philippines and foreign exchange reserves are at all time highs. Fiscal trends calendar year to date are better than expected in Indonesia and we maintain our high conviction in this trade as these countries continue to offer significant growth and yield in a world where both are increasingly difficult to come by.
At the stock level, Malaysian positioning was a major drag on relative performance, as we did not own rubber glove manufacturers Top Glove and Hartelega. Both companies rallied significantly as global demand for personal protective equipment surged. It was a frustrating trade to miss but given the huge capacity expansion we have seen globally we do not believe that earnings will be sustained at the current levels.
INVESTMENT THEMES & ACTIVITY
Equally, there were a number of areas of strong performance during the year, which broadly split into the following themes: the shifting consumption habits of a growing middle class, de-carbonisation and a cyclical recovery in frontier market growth.
Consumption habits have continued to evolve alongside rising frontier market incomes. Leading Vietnamese soymilk producer, Quang Ngai Sugar, has benefited from shifting preferences towards its dominant Vinasoy brand. Charoen Pokphand Foods, a global agricultural conglomerate listed in Thailand benefited from increasing per capita meat consumption across emerging markets, with pricing particularly strong as the company was able to avoid its herds being infected with African Swine Flu. Saudi Arabian food producer, Almarai, saw increasing demand for its milk products, while Pakistani bank, MCB, has grown its user base to over 7 million, by improving remote access through internet and mobile banking services. Kazatomprom, the world’s lowest cost uranium producer, also performed well in anticipation of demand outstripping supply over the next few years.
With growing awareness of the changes that will be required to meet the Paris Climate Agreement, many consumers and governments are starting to shift their investment priorities, a trend which we expect to accelerate through the next decade. The climate focus within the EU Recovery Fund is a prime example of this. Within our portfolio positive contributors included a number of utility companies such as Terna Energy, the leading Greek offshore wind energy producer, and Colbún, the leading Chilean hydroelectricity company. We have recently initiated a position in Sociedad Química y Minera de Chile (SQM), a leading player in the supply of lithium for batteries for electric vehicles, an area of growth we are particularly excited about.
The severity of the market sell-off in the first quarter of 2020 resulted in significant price dislocations across sectors, creating an unprecedented level of opportunity to buy strong cash flow generating businesses at steep discounts relative to history. We used the market volatility to invest in selected cyclical companies in anticipation of economic recovery. In Poland, we initiated a position in LPP, the leading clothing retailer which has been seeing triple digit growth in its online business. In addition to aforementioned Wizz Air Holdings, we also bought a position in Air Arabia, the leading low-cost carrier in the Middle East with an even greater US$3bn of cash on its balance sheet. A number of banks also performed well, being Halyk Savings Bank in Kazakhstan, Banca Transilvania in Romania and MCB Bank in Pakistan. These are well capitalised banks, offering a very attractive yield in countries where there continues to be a positive yield curve. Low-cost Kazakh copper producer, KAZ Minerals, was the period’s top contributor. Having exited the stock in February, we were able to buy it back around 40% cheaper in second quarter of 2020. The stock rebounded as the market increasingly appreciated the critical use of copper in building out the energy infrastructure of a de-carbonising world.
A more extensive overview of these themes and their importance in the portfolio can be found in our piece, “Thematic opportunities for tomorrow” contained within the Annual Report for the year ended 30 September 2020.
There do remain areas of frontier markets where we have concerns. We exited Turkey given further signs of unwelcome intervention in the currency market. We also reduced exposure to the UAE real estate sector amid the need for prolonged inventory destocking.
OUTLOOK
While COVID-19 remains a key short-term global uncertainty, we are more optimistic on the medium-term outlook for frontier markets. Many countries within our universe have seen a near V-shaped rebound in economic activity and now have considerably less fiscal overhang than their peers in developed markets. It is also worth highlighting that these smaller economies remain a material source of growth and yield in a world that lacks both. Furthermore, in several countries, currencies are now highly attractive on a real effective exchange rate basis.
On our analysis, frontier markets currently represent close to 30% of the world’s population, 12% of total gross domestic product (GDP), and 5% of net profits. Despite this, they account for only 1% of world indices, a number that has declined significantly over the last 10 years. We remain convinced that over time frontier markets’ index representation should grow towards their share of world profits, which in turn should be more reflective of their contribution to GDP. Over the longer term, as these countries become richer, we believe that considerably more than 1% of investors’ capital will be allocated to the countries in which nearly 3 billion people live. In an investment world increasingly focused on ESG, we find it strange that the poorest 3 billion have been increasingly side lined by both index providers and allocators of capital.
While during recent years, frontier markets, despite their growth, have been out of favour, we believe that in a post COVID-19 world awash with record liquidity, investors will remember the considerable attractions of our investment universe. The megatrends highlighted above have not been impacted by COVID-19. On the contrary, their importance and duration have been amplified during this most challenging of years.
We have identified climate change, rapid urbanisation, emerging global wealth, and demographics as key megatrends that will dominate the investment climate for years to come. We believe that nowhere are these themes more prevalent than in frontier markets; and that this will become increasingly recognised over the next decade offering numerous opportunities to the Company.
We are broadly positioned for a normalisation in global economic activity. We remain positive on areas where policy makers have taken upfront, prudent measures to contain COVID-19, where the foreign currency debt situation is relatively manageable, and countries that will benefit from a lower oil price and whose currencies appear inexpensive. As such, Indonesia, the Philippines, and Vietnam appear attractive. Like all asset classes, frontier markets are not without risk but we think that these risks are largely reflected in asset prices. After a particularly challenging couple of years, and with valuations near all-time lows, despite growth rebounding strongly, we suggest that investors look once again at this most exciting yet often ignored asset class.
SAM VECHT AND EMILY FLETCHER
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
10 December 2020
1 Source: BlackRock, as at 30 September 2020.
2 Source: MSCI. With effect from 1 April 2018 the Benchmark Index changed to MSCI Emerging Markets ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index. Prior to 1 April 2018, the Benchmark Index was MSCI Frontier Markets Index. The performance of the Benchmark Index has been blended to reflect this change.
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
PORTFOLIO
TEN LARGEST INVESTMENTS1
1 PTT Exploration & Production (2019: n/a)
Energy (Thailand)
Portfolio value: $9,938,000
Percentage of net assets: 3.2% (2019: Nil)
A Thai national petroleum exploration and production company focusing on natural gas, crude oil, and condensate. The company has operations across Asia Pacific, the Americas, the Middle East, and Africa.
2 Bank Mandiri (2019: 18th)
Financials (Indonesia)
Portfolio value: $9,476,000
Percentage of net assets: 3.1% (2019: 2.3%)
One of Indonesia’s largest financial institutions with IDR 1,318 Trillion, Bank Mandiri is supported by 11 subsidiaries that together offer integrated services meeting communities’ needs, including Sharia Banking Services, Multifinance, Insurance, Investment Banking, Venture Capital, and Remittance.
3 Mobile World2 (2019: 7th)
Consumer Discretionary (Vietnam)
Portfolio value: $9,260,000
Percentage of net assets: 3.0% (2019: 2.7%)
Vietnam’s top mobile phone retailer by revenue and net profit after tax with 2,200+ stores nationwide. Mobile World operates the following concepts: “The Gioi Di Dong” mobile phone retail chain, “Dien May Xanh” consumer electronics retail chains, “Bach Hoa Xanh” grocery retail chain. In addition, Mobile World expanded to regional markets with the first mobile phone retail chain named “Bigphone” in Cambodia.
4 LT Group (2019: 6th)
Industrials (Philippines)
Portfolio value: $8,290,000
Percentage of net assets: 2.7% (2019: 2.9%)
A diversified investment company that engages in beverages, tobacco, property development, and banking businesses in the Philippines.
5 Eastern Tobacco (2019: 5th)
Consumer Staples (Egypt)
Portfolio value: $8,282,000
Percentage of net assets: 2.7% (2019: 2.9%)
Eastern Tobacco is an Egypt-based company, which is engaged in manufacturing tobacco products. The Company’s product portfolio includes cigarettes, cigars, pipe tobacco, and molasses tobacco (Moassels), as well as other related products such as cigarettes’ filter rods and homogenized tobacco.
6 United International Transport2 (2019: 20th)
Industrials (Saudi Arabia)
Portfolio value: $8,163,000
Percentage of net assets: 2.7% (2019: 2.2%)
Colloquially known as ‘Budget Saudi’, the company operates a fleet of over 24,000 cars through 101 rental offices across Saudi Arabia and the Middle East.
7 CP All (2019: n/a)
Consumer Staples (Thailand)
Portfolio value: $8,095,000
Percentage of net assets: 2.6% (2019: Nil)
Initially established to operate convenience stores in Thailand under the “7-Eleven” trademark, the company has expanded to include bill payment and collection services, manufacturing and sale of convenience store food and bakery products, and more recently, membership-based wholesale services through the Makro brand.
8 Astra International3 (2019: 1st)
Consumer Discretionary (Indonesia)
Portfolio value: $8,078,000
Percentage of net assets: 2.6% (2019: 3.5%)
Astra International is an Indonesian conglomerate. It owns Southeast Asia’s largest independent automotive group and is the leading provider of a full range of automobile and motor-cycle products. Astra also has interests in financial services; heavy equipment, mining, construction and energy; agribusiness; infrastructure and logistics; information technology; and property. It is also an active participant in the development of Indonesia’s strategic infrastructure, including toll roads, energy, transportation and logistics and sea ports.
9 Indocement Tunggal Prakarsa (2019: n/a)
Materials (Indonesia)
Portfolio value: $7,753,000
Percentage of net assets: 2.5% (2019: Nil)
One of Indonesia’s largest cement producers, the company’s business includes manufacturing, ready-mix concrete and aggregates.
10 MCB Bank2 (2019: 25th)
Financials (Pakistan)
Portfolio value: $7,699,000
Percentage of portfolio: 2.5% (2019: 2.0%)
One of Pakistan’s largest banks with a total customer base exceeding 7 million. Consumer access is a key focus for the lender, boasting a 1,400+ branch network and strong remote banking services, through both Internet and Mobile Banking products.
1 Gross market exposure as a % of net assets. Percentages in brackets represent the portfolio holding at 30 September 2019.
2 Exposure gained via contracts for difference only.
3 Includes exposure gained via both contracts for difference and equity holdings.
Country allocation: Absolute weights (Gross market exposure as a % of net assets)1
| Indonesia | 13.4 |
| Saudi Arabia | 10.7 |
| Vietnam | 9.8 |
| Philippines | 9.5 |
| Thailand | 7.6 |
| Egypt | 7.5 |
| Chile | 6.2 |
| Kazakhstan | 5.3 |
| Greece | 5.0 |
| Romania | 4.1 |
| Pakistan | 3.8 |
| Malaysia | 3.8 |
| Qatar | 3.6 |
| Poland | 3.1 |
| Czech Republic | 1.9 |
| Ukraine | 1.8 |
| Pan-Africa | 1.7 |
| Peru | 1.7 |
| United Arab Emirates | 1.7 |
| Pan-Emerging Europe | 1.6 |
| Hungary | 1.4 |
| Kenya | 1.3 |
| Panama | 0.8 |
| Nigeria | 0.5 |
Source: BlackRock.
Country allocation relative to the Benchmark Index (%)1
| Vietnam | 7.7 |
| Egypt | 6.7 |
| Kazakhstan | 5.1 |
| Indonesia | 4.5 |
| Philippines | 4.2 |
| Greece | 4.1 |
| Pakistan | 3.7 |
| Romania | 3.5 |
| Chile | 2.5 |
| Ukraine | 1.8 |
| Pan-Africa | 1.7 |
| Pan-Emerging Europe | 1.6 |
| Czech Republic | 1.2 |
| Panama | 0.8 |
| Kenya | 0.7 |
| Hungary | 0.0 |
| Peru | 0.0 |
| Jordan | -0.1 |
| Tunisia | -0.1 |
| Sri Lanka | -0.1 |
| Nigeria | -0.2 |
| Mauritius | -0.2 |
| Croatia | -0.2 |
| Oman | -0.2 |
| Lebanon | -0.3 |
| Bangladesh | -0.3 |
| Slovenia | -0.3 |
| Bahrain | -0.6 |
| Argentina | -0.9 |
| Morocco | -0.9 |
| Colombia | -1.2 |
| Poland | -1.5 |
| Qatar | -2.2 |
| United Arab Emirates | -2.4 |
| Turkey | -2.6 |
| Kuwait | -4.4 |
| Thailand | -5.2 |
| Malaysia | -8.7 |
| Saudi Arabia | -9.4 |
1Includes exposure gained through equity positions and long and short CFD positions.
Sources: BlackRock and Datastream.
Sector allocation: Absolute weights (Gross market exposure as a % of net assets)1
| Financials | 29.1 |
| Consumer Discretionary | 16.0 |
| Industrials | 14.0 |
| Materials | 13.6 |
| Consumer Staples | 8.0 |
| Energy | 6.3 |
| Utilities | 6.2 |
| Real Estate | 5.6 |
| Communication Services | 3.7 |
| Health Care | 3.0 |
| Information Technology | 2.3 |
Source: BlackRock.
Sector allocation relative to the Benchmark Index (%)1
| Consumer Discretionary | 12.5 |
| Industrials | 8.1 |
| Materials | 3.1 |
| Information Technology | 1.5 |
| Utilities | 1.2 |
| Real Estate | 1.2 |
| Consumer Staples | -1.1 |
| Health Care | -1.5 |
| Energy | -1.7 |
| Communication Services | -6.9 |
| Financials | -8.6 |
1Includes exposure gained through equity positions and long CFD positions.
Sources: BlackRock and Datastream.
INVESTMENTS AS AT 30 SEPTEMBER 2020
EQUITY PORTFOLIO
Company | Principal country of operation | Sector | Fair value1 US$’000 | Gross market exposure as a % of net assets3 |
| Bank Mandiri | Indonesia | Financials | 9,476 | 3.1 |
| Indocement Tunggal Prakarsa | Indonesia | Materials | 7,753 | 2.5 |
| Astra International | Indonesia | Consumer Discretionary | 6,264 | 2.0 |
| Bank Rakyat | Indonesia | Financials | 5,804 | 1.9 |
| Mitra Adiperkasa | Indonesia | Consumer Discretionary | 4,320 | 1.4 |
| Pakuwon Jati | Indonesia | Real Estate | 4,239 | 1.4 |
| ————– | ————– | |||
| 37,856 | 12.3 | |||
| ======== | ======== | |||
| LT Group | Philippines | Industrials | 8,290 | 2.7 |
| Bloomberry Resorts | Philippines | Consumer Discretionary | 6,727 | 2.2 |
| Bank of the Philippine Islands | Philippines | Financials | 5,623 | 1.9 |
| International Container Terminal Services | Philippines | Industrials | 4,942 | 1.6 |
| GT Capital Holding | Philippines | Industrials | 3,374 | 1.1 |
| ————– | ————– | |||
| 28,956 | 9.5 | |||
| ======== | ======== | |||
| PTT Exploration & Production | Thailand | Energy | 9,938 | 3.2 |
| CP All | Thailand | Consumer Staples | 8,095 | 2.6 |
| Aeon Thana Sinsap | Thailand | Financials | 5,251 | 1.8 |
| ————– | ————– | |||
| 23,284 | 7.6 | |||
| ======== | ======== | |||
| Eastern Tobacco | Egypt | Consumer Staples | 8,282 | 2.7 |
| EFG Hermes Holdings | Egypt | Financials | 6,232 | 2.0 |
| Orascom Construction | Egypt | Industrials | 5,625 | 1.9 |
| Integrated Diagnostics | Egypt | Health Care | 2,749 | 0.9 |
| ————– | ————– | |||
| 22,888 | 7.5 | |||
| ======== | ======== | |||
| Empresas CMPC | Chile | Materials | 6,186 | 2.0 |
| Sociedad Química y Minera de Chile ADR | Chile | Materials | 6,000 | 2.0 |
| Banco Santander Chile | Chile | Financials | 3,517 | 1.1 |
| Colbún | Chile | Utilities | 3,461 | 1.1 |
| ————– | ————– | |||
| 19,164 | 6.2 | |||
| ======== | ======== | |||
| Halyk Savings Bank | Kazakhstan | Financials | 7,587 | 2.5 |
| Kazatomprom | Kazakhstan | Energy | 4,742 | 1.5 |
| KAZ Minerals | Kazakhstan | Materials | 4,031 | 1.3 |
| ————– | ————– | |||
| 16,360 | 5.3 | |||
| ======== | ======== | |||
| Hellenic Telecom Organisation | Greece | Communication Services | 5,927 | 1.9 |
| Terna Energy | Greece | Utilities | 5,839 | 1.9 |
| National Bank of Greece | Greece | Financials | 2,068 | 0.7 |
| ————– | ————– | |||
| 13,834 | 4.5 | |||
| ======== | ======== | |||
| Banca Transilvania | Romania | Financials | 7,625 | 2.5 |
| OMV Petrom | Romania | Energy | 4,800 | 1.6 |
| ————– | ————– | |||
| 12,425 | 4.1 | |||
| ======== | ======== | |||
| RHB Bank | Malaysia | Financials | 6,194 | 2.0 |
| Genting | Malaysia | Consumer Discretionary | 3,429 | 1.1 |
| British American Tobacco Malaysia | Malaysia | Consumer Staples | 1,928 | 0.7 |
| ————– | ————– | |||
| 11,551 | 3.8 | |||
| ======== | ======== | |||
| KRUK | Poland | Financials | 4,574 | 1.5 |
| LPP | Poland | Consumer Discretionary | 2,639 | 0.9 |
| ————– | ————– | |||
| 7,213 | 2.4 | |||
| ======== | ======== | |||
| Ferrexpo | Ukraine | Materials | 5,503 | 1.8 |
| ————– | ————– | |||
| 5,503 | 1.8 | |||
| ======== | ======== | |||
| Industries Qatar | Qatar | Industrials | 5,376 | 1.8 |
| ————– | ————– | |||
| 5,376 | 1.8 | |||
| ======== | ======== | |||
| Vivo Energy | Pan-Africa | Consumer Discretionary | 5,256 | 1.7 |
| ————– | ————– | |||
| 5,256 | 1.7 | |||
| ======== | ======== | |||
| Credicorp | Peru | Financials | 5,211 | 1.7 |
| ————– | ————– | |||
| 5,211 | 1.7 | |||
| ======== | ======== | |||
| Emaar Properties | United Arab Emirates | Real Estate | 5,125 | 1.7 |
| ————– | ————– | |||
| 5,125 | 1.7 | |||
| ======== | ======== | |||
| Erste Group Bank | Pan-Emerging Europe | Financials | 4,803 | 1.6 |
| ————– | ————– | |||
| 4,803 | 1.6 | |||
| ======== | ======== | |||
| Wizz Air Holdings | Hungary | Industrials | 4,192 | 1.4 |
| ————– | ————– | |||
| 4,192 | 1.4 | |||
| ======== | ======== | |||
| Equity Group | Kenya | Financials | 3,759 | 1.2 |
| ————– | ————– | |||
| 3,759 | 1.2 | |||
| ======== | ======== | |||
| Hub Power | Pakistan | Utilities | 3,740 | 1.2 |
| ————– | ————– | |||
| 3,740 | 1.2 | |||
| ======== | ======== | |||
| Copa Holdings | Panama | Industrials | 2,569 | 0.8 |
| ————– | ————– | |||
| 2,569 | 0.8 | |||
| ======== | ======== | |||
| Guaranty Trust Bank | Nigeria | Financials | 1,567 | 0.5 |
| ————– | ————– | |||
| 1,567 | 0.5 | |||
| ======== | ======== | |||
| Equity investments | 240,632 | 78.6 | ||
| ======== | ======== | |||
| BlackRock’s Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund (Cash Fund) | 64,465 | 21.1 | ||
| ======== | ======== | |||
| Total equity investments (including Cash Fund) | 305,097 | 99.7 | ||
| ======== | ======== |
CFD PORTFOLIO
Company | Principal country of operation | Sector | Fair value1 US$’000 | Gross market exposure2 US$’000 | Gross market exposure as a % of net assets3 |
| Long positions | |||||
| United International Transport | Saudi Arabia | Industrials | 8,163 | 2.7 | |
| Sahara International Petrochemical | Saudi Arabia | Materials | 7,242 | 2.3 | |
| National Medical Care | Saudi Arabia | Health Care | 6,445 | 2.1 | |
| Leejam Sports | Saudi Arabia | Consumer Discretionary | 5,731 | 1.9 | |
| Yanbu National Petrochemical | Saudi Arabia | Materials | 5,106 | 1.7 | |
| ————– | ————– | ||||
| 32,687 | 10.7 | ||||
| ======== | ======== | ||||
| Mobile World | Vietnam | Consumer Discretionary | 9,260 | 3.0 | |
| Vincom Retail | Vietnam | Real Estate | 7,452 | 2.5 | |
| FPT | Vietnam | Information Technology | 6,987 | 2.3 | |
| Quang Ngai Sugar | Vietnam | Consumer Staples | 6,105 | 2.0 | |
| ————– | ————– | ||||
| 29,804 | 9.8 | ||||
| ======== | ======== | ||||
| MCB Bank | Pakistan | Financials | 7,699 | 2.5 | |
| Hub Power | Pakistan | Utilities | 203 | 0.1 | |
| ————– | ————– | ||||
| 7,902 | 2.6 | ||||
| ======== | ======== | ||||
| CEZ | Czech Republic | Utilities | 5,899 | 1.9 | |
| ————– | ————– | ||||
| 5,899 | 1.9 | ||||
| ======== | ======== | ||||
| Ooredoo | Qatar | Communication Services | 5,521 | 1.8 | |
| ————– | ————– | ||||
| 5,521 | 1.8 | ||||
| ======== | ======== | ||||
| Astra International | Indonesia | Consumer Discretionary | 1,814 | 0.6 | |
| Mitra Adiperkasa | Indonesia | Consumer Discretionary | 1,514 | 0.5 | |
| ————– | ————– | ||||
| 3,328 | 1.1 | ||||
| ======== | ======== | ||||
| LPP | Poland | Consumer Discretionary | 2,235 | 0.7 | |
| ————– | ————– | ||||
| 2,235 | 0.7 | ||||
| ======== | ======== | ||||
| National Bank of Greece | Greece | Financials | 1,657 | 0.5 | |
| ————– | ————– | ||||
| 1,657 | 0.5 | ||||
| ======== | ======== | ||||
| Equity Group | Kenya | Financials | 280 | 0.1 | |
| ————– | ————– | ||||
| 280 | 0.1 | ||||
| ======== | ======== | ||||
| Kuwait Food (Americana)4 | Kuwait | Consumer Discretionary | 3 | 0.0 | |
| ————– | ————– | ||||
| 3 | 0.0 | ||||
| ======== | ======== | ======== | |||
| Total long CFD positions | (10) | 89,316 | 29.2 | ||
| ======== | ======== | ======== |
The Company was geared through the use of long and short CFD positions and gross and net gearing as at 30 September 2020 was 107.8% and 107.8% respectively as the Company had no short positions at that date (2019: 114.1% and 106.0% respectively). Gross and net gearing are Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 30 September 2020.
1 Fair value is determined as follows:
– Listed investments are valued at bid prices where available, otherwise at latest market traded quoted prices.
– The sum of the fair value column for the CFD contracts totalling US$(10,000) represents the fair valuation of all the CFD contracts, which is determined based on the difference between the notional transaction price and value of the underlying shares in the contract (in effect the unrealised gains/(losses) on the exposed positions). The cost of purchasing the securities held through long CFD positions directly in the market would have amounted to US$89,326,000 at the time of purchase, and subsequent market movements in prices have resulted in unrealised losses on the long CFD positions of US$10,000 resulting in the value of the total market exposure to the underlying securities decreasing to US$89,316,000 as at 30 September 2020.
2 The gross market exposure column for Cash and cash equivalents has been adjusted to assume the Company purchased direct holdings rather than exposure being gained through CFDs.
3 Market exposure in the case of equity investments is the same as fair value. In the case of CFDs it is the market value of the underlying shares to which the portfolio is exposed via the contract.
4 Unquoted investment.
GOVERNANCE
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 30 September 2020.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal activity is portfolio investment.
INVESTMENT OBJECTIVE
The Company’s investment objective is to achieve long-term capital growth by investing in companies domiciled or listed in, or exercising the predominant part of their economic activity in, less developed countries. These countries (the “Frontiers Universe”) are any country which is neither part of the MSCI World Index of developed markets, nor one of the eight largest countries by market capitalisation in the MSCI Emerging Markets Index as at 1 April 2018: being Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan (the “Selected Countries”).
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
Strategy
To achieve its objective, the Company invests globally in the securities of companies domiciled or listed in, or exercising the predominant part of their economic activity in, the Frontiers Universe.
Business model
The Company’s business model follows that of an externally managed investment trust, therefore the Company does not have any employees and outsources its activities to third-party service providers, including BlackRock Fund Managers Ltd (BFM) (‘the Manager’) which is the principal service provider.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager. The Manager has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (BIM (UK)) (‘the Investment Manager’). The contractual arrangements with, and assessment of, the Manager are summarised in the Directors’ report contained within the Company’s Annual Report for the year ended 30 September 2020. The Investment Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company. Other service providers include the Depositary and the Fund Accountant, The Bank of New York Mellon (International) Limited, and the Registrar, Computershare Investor Services PLC (Computershare). Details of the contractual terms with third-party service providers are set out in the Directors’ Report.
Investment policy
The Company will seek to maximise total return and will invest globally in the securities of companies domiciled or listed in, or exercising the predominant part of their economic activity in, the Frontiers Universe. Performance is measured against the Company’s Benchmark Index, which is a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index (net total return, USD). The Investment Manager is not constrained by the geographical weightings of the Benchmark Index and the Company’s portfolio may frequently be overweight or underweight any particular country relative to the Benchmark Index. The Company will exit any investment as soon as reasonably practicable following the relevant company ceasing to be domiciled or listed in, or exercising the predominant part of its economic activity in, the Frontiers Universe.
In order to achieve the Company’s investment objective, the Investment Manager selects investments through a process of fundamental and geopolitical analysis, seeking long-term appreciation from mispriced value or growth. The Investment Manager employs both a top-down and bottom-up approach to investing. It is expected that the Company will have exposure to between 35 to 65 holdings.
Where possible, investment will generally be made directly in the stock markets of the Frontiers Universe. Where the Investment Manager determines it appropriate, investment may be made through collective investment schemes, although such investments are not likely to be significant. Investment in other closed-ended investment funds admitted to the Official List will not exceed more than 10 per cent, in aggregate, of the value of the Gross Assets (calculated at the time of any relevant investment). It is intended that the Company will generally be invested in equity investments; however, the Investment Manager may invest in equity-related investments, such as derivatives or convertibles, and, to a lesser extent, in bonds or other fixed-income securities, including high risk debt securities. These securities may be below investment grade.
Due to national and/or international regulation, excessive operational risk, prohibitive costs and/or the time period involved in establishing trading and custody accounts in certain countries in the Frontiers Universe, the Company may be unable to invest (whether directly or through nominees) in companies in certain countries in the Frontiers Universe or, in the opinion of the Company and/or the Investment Manager, it may not be advisable to do so. In such circumstances, or in countries where acceptable custodial and other arrangements are not in place to safeguard the Company’s investments, the Company intends to gain economic exposure to companies in such countries by investing indirectly through derivatives. Derivatives are financial instruments linked to the performance of another asset or security, such as promissory notes, contracts for difference, futures or traded options. Save as provided below, there is no restriction on the Company investing in derivatives in such circumstances or for efficient portfolio management purposes.
The Company may be geared through borrowings and/or by entering into derivative transactions (taking both long and short positions) that have the effect of gearing the Company’s portfolio to enhance performance. The Company may also use borrowings for the settlement of transactions, to facilitate share repurchases (where applicable) and to meet on-going expenses. The respective limits on gearing (whether through the use of derivatives, borrowings or a combination of both) are set out below:
- Maximum gearing through the use of derivatives or borrowings to gain exposure to long positions in securities: 140 per cent of net assets
- Maximum exposure to short positions (for shorting purposes the Company may use indices or individual stocks): 10 per cent of net assets
- Maximum gross exposure (total long exposure plus total short exposure): 150 per cent of net assets
- Maximum net exposure (total long exposure minus total short exposure): 130 per cent of net assets
In normal circumstances, the Company will typically have net exposure of between 95 per cent and 120 per cent of net assets.
When investing via derivatives, the Company will seek to mitigate and/or spread its counterparty risk exposure by collateralisation and/or contracting with a potential range of counterparty banks, as appropriate, each of which shall, at the time of entering into such derivatives, have a Standard & Poor’s credit rating of at least A- on its long-term senior unsecured debt.
The Company may invest up to 5 per cent of its Gross Assets (at the time of such investment) in unquoted securities. The Company will invest so as not to hold more than 15 per cent of its Gross Assets in any one stock or derivative position at the time of investment (excluding cash management activities).
No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution.
A detailed analysis of the Company’s portfolio has been provided above.
INVESTMENT APPROACH AND PROCESS
Portfolio construction is a continuous process, with the Investment Manager analysing constantly the impact of new ideas and information on the portfolio as a whole. The approach is flexible, varying through market and economic cycles to create a portfolio appropriate to the focused and unconstrained strategy of the Company. The macro environment is factored into all portfolio decisions. In general, macro analysis is a more dominant factor in investment decision making when the outlook is negative. The macro process is comprised of three parts: political assessment, macroeconomic analysis and appraisal of the valuation of a country’s market, which can only take place with thorough analysis of stock specific opportunities.
The Investment Manager’s research team generates ideas from a diverse range of sources. When permitted, these include frequent travel to the markets in which the Company invests and regular conversations with contacts that allow the Frontiers team to assess the entire eco-system around a company; namely competitors, suppliers, financiers, customers and regulators. The team leverages the internal research network sharing information between BlackRock’s investment teams using a proprietary research application and database, and develops insights from macroeconomic analysis. The Board believes that BlackRock’s research platform is a significant competitive advantage, both in terms of information specific to emerging and frontier market equities and through its global insights across asset classes. Access to companies is extremely good given BlackRock’s market presence, which makes it possible to develop a detailed knowledge of a company and its management.
The research process focuses on cash flow and future earnings growth, as the investment team believes that this is ultimately the driver of share prices over time. The process is designed with the aim of identifying companies that can translate top line revenue growth to free cash flow and investing in these companies when the analysis suggests that the cash flow stream is undervalued. Financial models are developed focusing on company financials, particularly cash flow statements, rather than relying on third party research.
Environmental, Social and Governance (ESG) factors can be useful and relevant indicators for investment purposes and can help portfolio managers with their decision making through identifying potentially negative events or corporate behaviour. This results in the expectation that there will be an outperformance bias towards better governed companies in the long-run. The portfolio managers work closely with BlackRock’s Investment Stewardship team (BIS) to assess the governance quality of companies and investigate any potential issues, risks or opportunities.
Specific to corporate governance, the portfolio management team leverages local expertise in its proprietary, risk-based approach. Financial statement integrity is central to the analysis, where BIS applies a range of systematic measures to highlight companies’ accounting ratios in its assessment of balance sheet and earnings quality risks. For other categories under the corporate governance umbrella (e.g. audit quality, board accountability, executive pay and ownership and control), BIS flags risks based on internal research, including regulatory filings announcements and public news feeds. Governance (G) data from MSCI ESG Research Manager and other data sources may also be employed for supporting consideration. Environmental (E) and Social (S) factors are primarily assessed using BlackRock’s propriety data and MSCI data, examining whether specific E&S exposure exists, and if so, to determine how well such exposure is being managed. Further information on the Manager’s approach to ESG and Socially Responsible Investing can be found in the Corporate Governance statement included within the Company’s Annual Report for the year ended 30 September 2020.
The Investment Managers’ research team monitors differing levels of risk throughout the process and believes that avoiding major downside events can generate significant outperformance over the long-term. Inputs from BlackRock’s Risk & Quantitative Analysis Team (RQA) are an integral part of the investment process. RQA analyse market and portfolio risk factors including stress tests, correlations, factor returns, cross-sectional volatility and attributions. BlackRock’s evaluation procedures and financial analysis of the companies within the portfolio also take into account environmental, social and governance matters and other business issues. The Company invests primarily on financial grounds to meet its stated objectives.
PERFORMANCE
Details of the Company’s performance for the year are given in the Chairman’s Statement above. The Investment Managers’ Report above includes a review of the main developments during the period, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Statement of Comprehensive Income below. The total loss for the year, after taxation, was US$77,943,000 (2019: loss of US$6,681,000) of which the revenue return amounted to US$12,200,000 (2019: US$18,924,000) and the capital loss amounted to US$90,143,000 (2019: loss of US$25,605,000).
The Directors are recommending the payment of a final dividend of 4.25 cents per ordinary share in respect of the year ended 30 September 2020 (2019: final dividend of 4.75 cents) as set out in the Chairman’s Statement above.
KEY PERFORMANCE INDICATORS
The Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts are set out below.
PERFORMANCE MEASURED AGAINST THE BENCHMARK INDEX
At each meeting the Board reviews the performance of the portfolio as well as the net asset value and share price for the Company and compares this to the return of the Company’s benchmark. The Board considers this to be an important key performance indicator and has determined that it should also be used to calculate whether a performance fee is payable to BlackRock. The Company’s absolute and relative performance is set out in the performance record table above.
SHARE RATING AND DISCOUNT
The Directors recognise the importance to investors that the Company’s share price should not trade at a significant discount or premium to NAV. Accordingly, the Directors monitor the share rating closely and will consider share repurchases in the market if the discount widens significantly, or the issue of shares to the market to meet demand to the extent that the Company’s shares are trading at a premium. In addition, in accordance with the Directors’ commitment at launch the Company will formulate and submit to shareholders proposals to provide them with an opportunity at each five year anniversary since launch, to realise the value of their ordinary shares at the prevailing NAV per share less applicable costs. The next opportunity will take place on or around the date of the Company’s AGM in February 2021.
For the year under review the Company’s shares traded at an average discount to the cum-income NAV of 3.2% and were trading at a discount of 3.7% on a cum-income basis at 8 December 2020. The Directors have the authority to buy back up to 14.99% of the Company’s issued share capital (excluding treasury shares). The Directors sought and received shareholder authority at the last AGM to issue up to 10% of the Company’s issued share capital (via the issue of new shares or sale of shares from treasury) on a non pre-emptive basis. Further information can be found in the Directors’ Report contained within the Company’s Annual Report for the year ended 30 September 2020.
ONGOING CHARGES
The ongoing charges reflect those expenses which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment company as a collective investment fund, excluding the costs of acquisition or disposal of investments, financing charges and gains or losses arising on investments and performance fees. The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the ongoing charges and monitors the expenses incurred by the Company.
The Board regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance of the Company against a peer group of Frontier Market open and closed-ended funds.
PRINCIPAL RISKS
As required by the 2018 UK Code of Corporate Governance, the Board has in place a robust, ongoing process to identify, assess and monitor the principal and emerging risks of the Company, including those that they consider would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis and incorporated these into the Company’s risk register. Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
A core element of this is the Company’s risk register, which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk, and the quality of the controls operating to mitigate the risk. A residual risk rating is then calculated for each risk based on the outcome of this assessment. This approach allows the effect of any mitigating procedures to be reflected in the final assessment.
The risk register, its method of preparation and the operation of the key controls in BlackRock’s and other third party service providers’ systems of internal control are reviewed on a regular basis by the Company’s Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third party service providers’ risk management processes and how these apply to the Company’s business, the Audit and Management Engagement Committee periodically receives presentations from BlackRock’s Internal Audit and Risk & Quantitative Analysis teams, and reviews Service Organisation Control (SOC 1) reports from BlackRock and the Company’s Custodian and Fund Accountant, The Bank of New York Mellon (International) Limited.
The current risk register includes a range of risks spread between performance risk, income/dividend risk, legal & regulatory risk, counterparty risk, operational risk, market risk, political risk and financial risk.
The principal risks and uncertainties faced by the Company during the year, together with the potential effects, controls and mitigating factors, are set out below.
| Principal Risk | Mitigation/Control |
| Investment Performance Risk The Board is responsible for:setting the investment policy to fulfil the Company’s objectives; andmonitoring the performance of the Company’s Investment Manager and the strategy adopted.An inappropriate policy or strategy may lead to:poor performance compared to the Company’s benchmark, peer group or shareholder expectations;a widening discount to NAV;a reduction or permanent loss of capital; anddissatisfied shareholders and reputational damage. | To manage this risk the Board:regularly reviews the Company’s investment mandate and long term strategy;has set, and regularly reviews, the investment guidelines and has put in place appropriate limits on levels of gearing and the use of derivatives;receives from the Investment Manager a regular explanation of stock selection decisions, portfolio gearing and any changes in gearing and the rationale for the composition of the investment portfolio;receives from the Investment Manager regular reporting on the portfolio’s exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions;monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the Company’s investment policy; andregularly reviews detailed performance attribution analysis. |
| Income/Dividend Risk The amount of dividends and future dividend growth will depend on the Company’s underlying portfolio. In addition, any change in the tax treatment of the dividends or interest received by the Company (including as a result of withholding taxes or exchange controls imposed by jurisdictions in which the Company invests) may reduce the level of dividends received by shareholders. | Although the Company does not have a policy of actively seeking income, the Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting including any impact on account of dividend cancellations due to the COVID-19 pandemic. The Company also has a revenue reserve and powers to pay dividends from capital which could potentially be used to support the Company’s dividend if required. |
| Legal and Regulatory Risk The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing its investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the Market Abuse Act, the UK Listing Rules and the Disclosure Guidance & Transparency Rules. | The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached and the results are reported to the Board at each meeting. Following authorisation under the Alternative Investment Fund Managers’ Directive (AIFMD), the Company and its appointed Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of this Directive are not correctly complied with. The Board and the AIFM also monitor changes in government policy and legislation which may have an impact on the Company. Compliance with the accounting standards applicable to quoted companies and those applicable to investment trusts are also regularly monitored to ensure compliance. The Company Secretary and the Company’s professional advisers monitor developments in relevant laws and regulations and provide regular reports to the Board in respect of the Company’s compliance. |
| Counterparty Risk The Company’s investment policy also permits the use of both exchange-traded and over-the-counter derivatives (including contracts for difference). The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. | Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Board reviews the controls put in place by the Investment Manager to monitor and to minimise counterparty exposure, which include intra-day monitoring of exposures to ensure that these are within set limits. |
| Operational Risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of BlackRock (the Investment Manager and AIFM), and of The Bank of New York Mellon (International) Limited (the Depositary and Fund Accountant), which ensures safe custody of the Company’s assets and maintains the Company’s accounting records. The Company’s share register is maintained by the Registrar, Computershare. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records, as a result of a cyberattack or otherwise, could impact the monitoring and reporting of the Company’s financial position. The security of the Company’s assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. | The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers and compliance with the investment management agreement on a regular basis. The Fund Accountant’s and the Manager’s internal control processes are regularly tested and monitored throughout the year and are evidenced through their Service Organisation Control (SOC 1) reports, which are subject to review by an Independent Service Assurance Auditor. The SOC 1 reports provide assurance in respect of the effective operation of internal controls. The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control. The Board considers succession arrangements for key employees of the Manager and the Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. In respect of the unprecedented and emerging risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board has received reports from key service providers setting out the measures that they have put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board are confident that a good level of service has and will be maintained. The Board also receives regular reports from BlackRock’s internal audit function. |
| Political Risk Investments in the Frontiers Universe may include a higher element of risk compared to more developed markets due to greater political instability. Political and diplomatic events in the Frontiers Universe where the Company invests (for example, governmental instability, corruption, adverse changes in legislation or other diplomatic developments such as the outbreak of war or imposition of sanctions) could substantially and adversely affect the economies of such countries or the value of the Company’s investments in those countries. | The Investment Manager mitigates this risk by applying stringent controls over where investments are made and through close monitoring of political risks. The Investment Manager’s approach to filtering the investment universe takes account of the political background to regions and is backed up by rigorous stock specific research and risk analysis, individually and collectively, in constructing the portfolio. The management team has a wide network of business and political contacts which provides economic insights with public and private bodies. This enables the Investment Manager to assess potential investments in an informed and disciplined way, as well as being able to conduct regular monitoring of investments once made. However, given the nature of political risk, all investments will be exposed to a degree of risk and the Investment Manager will ensure that the portfolio remains diversified across countries to mitigate the risk. The Board has specifically considered the potential impact of the Brexit process and associated trade negotiations between the UK and the EU and has determined that given the markets in which the Company invests, any impact would not represent a material threat to its strategy or business model, notwithstanding that there may be legal, regulatory or tax implications. |
| Financial Risk The Company’s investment activities expose it to a variety of financial risks which include foreign currency risk, liquidity risk, currency risk and interest rate risk. | Details of these risks are disclosed in note 18 to the financial statements in the Annual Report, together with a summary of the policies for managing these risks. |
| Market Risk Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. The securities markets of the Frontiers Universe are not as large as the more established securities markets and have substantially less trading volume, which may result in a lack of liquidity and higher price volatility. There are fewer attractive investment opportunities in Frontier Markets and this may lead to a delay in investment and may affect the price at which such investments may be made and reduce potential investment returns for the Company. There is also exposure to currency, market and political risk due to the location of the operation of the businesses in which the Company may invest. As a consequence of this and other market factors the Company may invest in a concentrated portfolio of shares and this focus may result in higher risk when compared to a portfolio that has spread or diversified investments more broadly. Corruption also remains a significant issue across the Frontiers Universe and the effects of corruption could have a material adverse effect on the Company’s performance. Accounting, auditing and financial reporting standards and practices and disclosure requirements applicable to many companies in developing countries may be less rigorous than in developed markets. As a result there may be less information available publicly to investors in these securities, and such information as is available is often less reliable. The Company also gains exposure to the Frontiers Universe by investing indirectly through Participatory Notes (P-Notes) which presents additional risk to the Company as P-Notes are uncollateralised resulting in the Company being subject to full counterparty risk via the P-Note issuer. P-Notes also present liquidity issues as the Company, being a captive client of a P-Note issuer, may only be able to realise its investment through the P-Note issuer and this may have a negative impact on the liquidity of the P-Notes which does not correlate to the liquidity of the underlying security. | Market risk represents the risks of investment in a particular market, country or geographic region. Therefore, this is largely outside of the scope of the Board’s control. However, the Board carefully considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. Market risk is also mitigated through portfolio diversification across countries and regions. The Board monitors the implementation and results of the investment process with the Investment Manager regularly. The Investment Manager regularly reports to the Board on relative market risks associated with investment in such regions. Further information is provided under ‘Political Risk’. The Board recognises the benefits of a closed-end fund structure in extremely volatile markets such as those affected by the COVID-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Portfolio Managers to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. |
VIABILITY STATEMENT
In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines. The Board is cognisant of the uncertainty surrounding the potential duration of the COVID-19 pandemic, its impact on the global economy and the prospects for many of the Company’s portfolio holdings. Notwithstanding this crisis, and given the factors stated below, the Board expects the Company to continue to meet its liabilities as they fall due for the foreseeable future and has therefore conducted this review for a period of five years. This is generally the investment holding period investors consider while investing in the frontier market sector. The Board also believes that the Company and its key third party service providers have in place appropriate business continuity plans and will be able to maintain service levels through the COVID-19 pandemic. The Board conducted this review for the period up to the AGM in 2025.
In determining this period, the Board took into account the Company’s investment objective to achieve long-term capital growth and the Company’s projected income and expenditure. It is satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound.
When the Company was launched in late 2010, the Board made a commitment that before the Company’s fifth AGM and at five yearly intervals thereafter, it would formulate and submit to shareholders proposals to provide shareholders with an opportunity to realise the value of their ordinary shares at the applicable NAV per ordinary share less applicable costs. The Board is putting proposals to shareholders this year which it is intended will be voted on at a general meeting in February 2021. The Board has reviewed the potential impact that such an offer may have on the Company’s going concern assessment, and in particular has considered feedback received from the Company’s corporate broker regarding shareholder demand for the Company’s shares and investor appetite for the Company’s investment strategy. The corporate broker remains in regular communication with shareholders and, based on shareholder views at the time of publication of this report, there is no indication that demand to exit will be at a level which would jeopardise the ongoing viability of the Company.
In making the longer term viability assessment the Board has considered the following factors:
- The Company’s principal risks as set out above;
- The level of ongoing demand for the Company’s ordinary shares;
- The impact of a significant fall in Frontier equity markets on the value of the Company’s investment portfolio, factoring in the impact of the recent volatility related to the COVID-19 pandemic;
- The ongoing relevance of the Company’s investment objective, business model and investment policy in the current environment;
- The operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future; and
- The effectiveness of business continuity plans in place for the Company and key service providers.
The Board has also considered a number of financial metrics, including:
- The level of current and historic ongoing charges incurred by the Company;
- The Company’s borrowings and its ability to meet its liabilities as they fall due;
- The premium or discount to NAV;
- The level of income generated by the Company since the outbreak of COVID-19;
- Future income forecasts; and
- The liquidity of the Company’s portfolio in the light of the impact of COVID-19 on global markets.
The Company is an investment company with a relatively liquid equity portfolio (as at 30 September 2020, 97.3% of the equity portfolio was capable of being realised in less than 20 days) and largely fixed overheads (excluding performance fees) which comprise a very small percentage of net assets (1.36%). In addition, any performance fees are capped at 1% of gross assets in years where the NAV per share has fallen or 2.5% of gross assets in years where the NAV per share has increased. Therefore, the Board has concluded that even in exceptionally stressed operating conditions, the Company would comfortably be able to meet its ongoing operating costs as they fall due.
However, investment companies may face other challenges, such as regulatory changes and the tax treatment of investment trusts, or a significant decrease in size due to substantial share buy-back activity or market falls, which may result in the Company no longer being of sufficient market capitalisation to represent viable investment propositions or no longer being able to continue in operation.
The Board has also considered the adverse impact of potential changes in law, regulation and taxation and the matter of foreign exchange risk. They have determined that although there are a number of potential risks associated with the Brexit process, any transition following any agreement, and the legal, fiscal and regulatory landscape thereafter, they do not believe that this represents a material threat to the Company’s strategy and business model, nor do they believe that the Investment Manager would be materially impeded in achieving the Company’s investment objective. In addition, the level of complexity, uncertainty and general lack of information present a number of potential outcomes and scenarios, which may or may not prove to be malign or benign and/or supportive of the Investment Manager in achieving the Company’s investment objective.
The Board has determined that the factors considered are applicable to the period up to the AGM in 2025 and beyond.
Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
PROMOTING THE SUCCESS OF THE BLACKROCK FRONTIERS INVESTMENT TRUST PLC
New regulations (The Companies (Miscellaneous Reporting) Regulations 2018) require directors to explain more fully how they have discharged their duties under section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This enhanced disclosure covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions.
As the Company is an externally managed investment company and does not have any employees or customers, the Board considers the main stakeholders in the Company to be the shareholders, key service providers (being the Manager and Investment Manager, the Custodian, Depositary, Registrar and Broker) and investee companies.
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long term success of the Company are set out in the table below.
Stakeholders
Shareholders | Manager and Investment Manager | Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long-term growth and income. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets, and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management of portfolio companies. |
Area of Engagement
| Issue | Engagement | Impact | |
| Responsible investing | The Board is committed to promoting the role and success of the Company in delivering on its investment mandate to shareholders over the long term. However, the Board recognises that securities within the Company’s investment remit may involve significant additional risk due to the political volatility and environmental, social and governance concerns facing many of the countries in the Company’s investment universe. These ethical and sustainability issues should be a key focus of our Manager’s research. More than ever, consideration of sustainable investment is a key part of the investment process and must be factored in when making investment decisions. The Board also have responsibility to shareholders to ensure that the Company’s portfolio of assets are invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board believes that responsible investment and sustainability are important to the longer term delivery of growth in capital and income and has worked very closely with the Manager throughout the year to regularly review the Company’s performance, investment strategy and underlying policies and to understand how ESG considerations are integrated into the investment process. The Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as its engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Manager reports to the Board in respect of its consideration of ESG factors and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out below. The Investment Manager’s engagement and voting policy is detailed within the Company’s Annual Report for the year ended 30 September 2020 and on the BlackRock website. | The Board and the Manager believe there is a positive correlation between strong ESG practices and investment performance. Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement above. The portfolio activities undertaken by the Manager, can be found in the Investment Manager’s Report above. |
| Discount Strategy | The Board believes that strong performance and an attractive dividend yield enhances demand for the Company’s shares, which will help to maintain the Company’s discount at as close to the underlying NAV as possible. The dividend is funded out of current year revenue and revenue reserves if current year revenue is insufficient. The Company does not have a policy of seeking income, however the portfolio has, to date, continued to deliver a level of income such that the Board is able to pay an attractive dividend. | The Manager reports total return performance statistics to the Board on a regular basis, along with the portfolio yield and the impact of dividends paid on brought forward distributable reserves. The Board reviews the Company’s discount/premium to NAV on a regular basis and holds regular discussions with the Manager and the Company’s broker regarding the discount/premium level. | The average discount for the year to 30 September 2020 was 3.2%. During the year the Company’s share price has traded at a maximum discount of 9.4% and a maximum premium of 5.6%. |
| Service levels of third party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service: including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries and the Company’s Brokers in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Brokers on an ongoing basis. Since the year end, in light of the challenges presented by the COVID-19 pandemic to the operation of business across the globe, the Board has worked closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s service providers. | All performance evaluations were performed on a timely basis and the Board concluded that all third party service providers, including the Manager, Custodian, Depositary and Fund administrator were operating effectively and providing a good level of service. The level of fee paid to the Depositary was reviewed and was reduced from 1.15 basis points per annum of net assets to rate of 0.95 basis points per annum with effect from 1 January 2019. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund administrator, Brokers, Registrar and printers, and is confident that arrangements are in place to ensure that a good level of service will continue to be provided despite the impact of the COVID-19 pandemic. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the new UK Code, including guidance on tenure and the composition of the Board’s committees. | Over recent years the Board undertook a review of succession planning arrangements and identified the need for action given that, if no action were taken, a majority of Board Directors would have had tenure in excess of nine years. The Board recognises the benefits of diversity and regular refreshment, but does not believe tenure alone should determine whether a Director remains independent. A search for a new Director was undertaken in 2019 and following a thorough search and selection process Mrs Katrina Hart was appointed on 1 October 2019. Mr Nick Pitts-Tucker subsequently advised the Board of his desire to retire at the 2021 AGM and will no longer be a Director of the Company at its conclusion. The Board, discharging the duties of a Nomination Committee will continue to keep the composition of the Board under regular review. If it is determined that a new appointment to the Board is required, it will agree the selection criteria, which will take into account the need to maintain a suitable balance of skills, knowledge, independence and diversity, including that of gender. All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions in respect of the 2020 evaluation process are given in the Annual Report). All Directors stand for re-election by shareholders annually. Shareholders may attend the AGM and raise any queries in respect of Board composition or individual Directors in person, or may contact the Company Secretary or the Chairman using the details provided in the Annual Report if they wish to raise any issues. | The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in 2020. Details for the proxy voting results in favour and against individual Directors’ re-election at the 2020 AGM are given on the Company’s website at www.blackrock.com/uk/ brfi. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders. Notwithstanding the challenges posed by the COVID-19 pandemic, in normal operating circumstances the Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders therefore have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Annual Report and Half-Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the website at www.blackrock.com/uk/brfi. The Board also works closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with shareholders in respect of the investment mandate and objective. Unlike trading companies, one-to-one shareholder meetings usually take the form of a meeting with the portfolio manager as opposed to members of the Board. As well as attending regular investor meetings the portfolio managers hold regular discussions with wealth management desks and offices to build on the case for, and understanding of, long-term investment opportunities in Frontier Markets. The Manager also coordinates public relations activity, including meetings between the portfolio managers and relevant industry publications to set out their vision for the portfolio strategy and outlook for the region. The Manager releases monthly portfolio updates to the market to ensure that investors are kept up to date in respect of performance and other portfolio developments, and maintains a website on behalf of the Company that contains relevant information in respect of the Company’s investment mandate and objective. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given in the Annual Report. | The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. Investors were also impressed with the wide pool of resource available through BlackRock’s Global Emerging Markets team, and the rigorous ‘bottom-up/top-down’ investment approach. Investors were concerned over the volatility of the Frontier Markets region and market liquidity. |
SUSTAINABILITY AND OUR ESG POLICIES
The Board’s approach
Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. The securities within the Company’s investment remit may involve significant additional risk due to the political volatility and ESG concerns facing many of the countries in the Company’s investment universe. These ethical and sustainability issues are a key focus of the Board, and your Board is committed to a diligent oversight of the activities of the Manager in these areas. The Board believes effective engagement with management is, in most cases, the most effective way of driving meaningful positive change in the behaviour of investee company management. This is particularly true for the Company’s Manager given the extent of BlackRock’s shareholder engagement (BlackRock held 3,040 engagements with 2,020 companies based in 54 markets for the year to 30 June 2020), and BlackRock’s capacity to vote against management when they fall short of its expectations. As well as the influence afforded by its sheer scale, the Board believes that BlackRock is well placed as Manager to fulfil these requirements due to the integration of ESG into its investment processes, the emphasis it places on sustainability, its collaborative approach in its investment stewardship activities and its position in the industry as one of the largest suppliers of sustainable investment products in the global market. More information on BlackRock’s approach to sustainability is set out below.
The importance of considering ESG when investing in the Frontiers Sector
| Environmental | Social | Corporate Governance |
| A key component of our focus on environmental risks and opportunities is the impact of climate change on companies’ business models and strategies over time. Our approach on climate is to focus our efforts on sectors and companies where climate change poses the greatest material risk to our clients’ investments. | BlackRock believes it is vital that companies maintain their social licence to operate. By this, BlackRock means that companies maintain broad acceptance from their employees, stakeholders, local communities and the national government. The portfolio management team’s site visits to companies’ assets provide them with valuable insight into these issues which often cannot be properly understood from company reports. | In conjunction with the BlackRock Investment Stewardship team, the portfolio management team actively engages with companies on a wide range of governance issues including board independence, executive compensation, shareholder protection and timely disclosure. |
Future prospects
The Board’s main focus is on the achievement of capital growth and the future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in both the Chairman’s Statement and in the Investment Manager’s Report above.
Social, community and human rights issues
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders’ interests to consider environmental, social and governance factors and human rights issues when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set in the Annual Report for the year ended 30 September 2020.
Modern slavery
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Directors, gender representation and employees
The Directors of the Company on 30 September 2020, all of whom held office throughout the year, are set out in the Directors’ biographies section in the Annual Report for the year ended 30 September 2020. As at the date of this report, the Board consists of four men and one woman constituting 20% female Board representation. The Company does not have any employees.
BY ORDER OF THE BOARD
KEVIN MAYGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
10 December 2020
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
RESPONSIBLE OWNERSHIP – BLACKROCK’S APPROACH
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients’ assets. From BlackRock’s perspective, business-relevant sustainability issues can contribute to a company’s long-term financial performance, and thus further incorporating these considerations into the investment research, portfolio construction, and stewardship process can enhance long-term risk adjusted returns. By expanding access to data, insights and learning on material ESG risks and opportunities in investment processes across BlackRock’s diverse platform, BlackRock believes that the investment process is greatly enhanced. The Company’s portfolio managers work closely with BlackRock’s Investment Stewardship team to assess the governance quality of companies and sustainable business practices, and investigate any potential issues, risks or opportunities. The portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio.
BLACKROCK’S APPROACH TO SUSTAINABLE INVESTING
Considerations about sustainability have been at the centre of BlackRock’s investment approach for many years and the firm offers more than 200 sustainable products and solutions. BlackRock believes that climate change is now a defining factor in companies’ long-term prospects, and that it will have a significant and lasting impact on economic growth and prosperity. BlackRock believes that climate risk now equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade.
In January 2020, with this transition in mind, BlackRock announced that it would accelerate its sustainable investing efforts and make a number of enhancements to its investment management and risk processes, including the following:
- Heightening scrutiny on sectors and issuers with a high ESG risk, such as thermal coal producers, due to the investment risk they present to client portfolios;
- Putting ESG analysis at the heart of Aladdin (BlackRock’s proprietary trading platform) and using proprietary tools to help analyse ESG risk; and
- Placing oversight of ESG risk with BlackRock’s Risk and Quantitative Analysis group (RQA), to ensure that ESG risk is given increased weighting as a risk factor and is analysed with the same weight given to traditional measures such as credit or liquidity risk.
INVESTMENT STEWARDSHIP
BlackRock also places a strong emphasis on sustainability in its stewardship activities and has engaged with companies on sustainability-related questions for a number of years. This year we made an explicit ask that companies align their disclosures to the Task Force on Climate-related Financial Disclosures (TCFD) framework and the Sustainability Accounting Standards Board (SASB) standards. This includes each company’s plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realised, as expressed by the TCFD guidelines. To this end, BlackRock joined Climate Action 100+, a natural progression in our work to advance sustainable business practices aligned with TCFD. BlackRock has aligned its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). BlackRock is committed to voting against management to the extent that they have not demonstrated sufficient progress on sustainability issues. More information on BlackRock’s policies on Corporate Sustainability can be found on BlackRock’s website at www.blackrock.com/corporate/sustainability.
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales. This year, BlackRock voted against or withheld votes from 5,130 directors at 2,809 different companies driven by concerns regarding director independence, executive compensation, insufficient progress on board diversity, and overcommitted directors, reflecting our intensified focus on sustainability risks. More details about BlackRock’s investment stewardship process can be found on BlackRock’s website at www.blackrock.com/corporate/about-us/investment-stewardship. In terms of its own reporting, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework.
BlackRock recognise that reporting to these standards requires significant time, analysis, and effort. BlackRock’s own SASB-aligned disclosure is available on its website at www.blackrock.com/corporate/literature/ continuous-disclosure-and-important-information/ blackrock-2019-sasb-disclosure.pdf, and BlackRock is committed to publishing a detailed TCFD-aligned report in 2021 on its 2020 activities. More information on BlackRock’s policies on Corporate Sustainability can be found on BlackRock’s website at www.blackrock.com/corporate/sustainability.
The above forms part of the Strategic Report.
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report contained within the Company’s Annual Report for the year ended 30 September 2020.
The investment management fee due for the year ended 30 September 2020 amounted to US$3,738,000 (2019: US$4,429,000). No performance fee is payable for the year (2019: US$nil). At the year end, US$1,740,000 was outstanding in respect of management fees (2019: US$2,385,000) and US$nil (2019: US$nil) was outstanding in respect of performance fees.
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 30 September 2020 amounted to US$116,000 excluding VAT (2019: US$79,000) of which marketing fees of US$71,000 excluding VAT (2019: US$147,000) were outstanding as at year end.
The Company has an investment in the BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund of US$64,465,000 (2019: US$71,191,000 held in BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund) at the year end, which is a fund managed by a company within the BlackRock Group.
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report contained within the Company’s Annual Report for the year ended 30 September 2020. At 30 September 2020, US$17,000 (£13,000) (2019: US$15,000 (£12,000)) was outstanding in respect of Directors’ fees.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable United Kingdom law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements under IFRS as adopted by the European Union. Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
- present fairly the financial position, financial performance and cash flows of the Company;
- select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- make judgements and estimates that are reasonable and prudent;
- state whether the financial statements have been prepared in accordance with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;
- provide additional disclosures when compliance with the specific requirements in IFRS as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s financial position and financial performance; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for preparing the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report, Corporate Governance Statement and the Report of the Audit and Management Engagement Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules. The Directors have delegated responsibility to the Investment Manager and the AIFM for the maintenance and integrity of the Company’s corporate and financial information included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed in the Annual Report, confirms to the best of their knowledge that:
- the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and
- the Strategic Report contained in the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The 2018 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit and Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Committee has reached these conclusions is set out in the Audit and Management Engagement Committee’s report in the Annual Report. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 30 September 2020, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
AUDLEY TWISTON-DAVIES
Chairman
10 December 2020
You can discover more about the BlackRock Frontiers Investment Trust at blackrock.com/uk/brfi
