Morningstar announced on Tuesday it had downgraded Blackrock Frontiers to an analyst rating of neutral, whereas previously it was bronze.
The decision was due to the board’s vote to widen the fund’s remit beyond frontier markets to the 16 smallest constituents of the MSCI Emerging Markets index.
Analyst Lena Tsymbaluk said: “While the rationale for the change of the remit and benchmark seems sensible, this represents a key modification to the fund’s investment universe, and it remains to be seen how the portfolio evolves as a result.
“The change has introduced emerging markets that the managers are not very familiar with such as Malaysia, Thailand, Indonesia, the Philippines, and Chile. The managers will have to build knowledge in those markets and more time is needed to see whether they can add value there.”
Morningstar added it was concerned by performance fees. In the year to 30 Sep 2016, ongoing charges were 2.4%, including a 1% performance fee.
Index reclassifications
Vecht (pictured) told Portfolio Adviser in April that the fund wanted to move away from the “upgrade-downgrade cycle” of the index provider, noting Argentina, Qatar and the UAE as recent constituents that have moved between the MSCI Emerging Markets and Frontier Markets indices.
Shareholders overwhelming supported the move with 99.92% of votes in favour of the amendment to the investment objective and policy.
Vecht is already facing the wind down of the Emerging Europe investment trust he manages with Chris Colunga following higher than expected shareholder interest in a tender offer.
Regarding the Morningstar downgrade, a Blackrock spokesperson said the board considered the changes to be in investors’ best interests, reflecting the evolving nature of frontier and emerging markets.
The spokesperson said: “The world of 2018 is not the world of 2008 and these changes position the trust for the future rather than being constrained to historic constructs. Sam Vecht has been managing emerging market portfolios since 2009 and the trust benefits from the contributions from close to 40 emerging market analysts located across the globe.”
