Blackrock Emerging Europe has told shareholders in the soon-to-be liquidated investment trust they can switch over into its Frontiers closed-ended strategy, despite the fact the two products sit in different sectors and track uncorrelated benchmarks.
Shareholders in Blackrock Emerging Europe have two options, according to a regulatory filing published on Friday. They can either exit at net asset value (NAV) less costs or rollover into new shares to be offered by Blackrock Frontiers, which shares a manager with Blackrock Europe. Those that pick the latter option will absorb costs up to 1% after which Blackrock will pick up the bill.
Blackrock Frontier investors have been told the new shares would improve liquidity and marketability of the investment trust, plus lower the ongoing charges figure, which currently sits at 1.6%.
Sam Vecht (pictured) is a manager in both trusts, joined by co-manager Chris Colunga on the £113.7m Blackrock Emerging Europe trust and Emily Fletcher on the £293.3m Frontiers investment trust.
The Emerging Europe board revealed in June the investment trust would be shutting up shop due to unexpectedly high interest in a tender offer, which meant shareholders could exit at net asset value (NAV).
Blackrock told Portfolio Adviser a vote on the liquidation of Emerging Europe would take place in Q4. It would be de-listed from the London Stock Exchange if votes are in favour of the liquidation. The length of the liquidation would depend on a number of factors, the asset manager said.
Emerging Europe versus Frontier markets
While the two investment trusts share a manager, their asset allocation and performance differ.
“The top eight countries in the Frontiers trust, none of them are in Emerging Europe, and that accounts for a significant proportion of the assets,” AJ Bell head of active portfolios Ryan Hughes told Portfolio Adviser.
“That includes countries like Argentina, Vietnam and Saudi Arabia. You’re getting a very different geographic allocation and therefore a very different political exposure and company exposure.”
A fifth of the Frontiers trust is exposed to Europe following the expansion of its investible universe in April, according to Morningstar manager research analyst Lena Tsymbaluk. The change in benchmark, which prompted Morningstar to downgrade the investment trust, significantly increased exposure to southeast Asian countries, she said.
The correlation coefficient between the two investment trusts over five years was 0.48. Hughes said a correlation higher than 0.75 would be preferable when choosing a replacement for Emerging Europe shareholders. Emerging Europe sat in the investment trust sector focused on that universe, while Frontiers is in the Global Emerging Markets sector.
Blackrock told Portfolio Adviser the decision to offer the Frontiers trust as an alternative followed shareholder consultation and reflected the “enduring popularity” of that trust, which trades at a 1.1% premium, according to the Association of Investment Companies (AIC).
Liquidity and marketability benefits for the Frontiers trust depended on how many Emerging Europe shareholders took up the offer, Hughes said.
“Frontiers is a £300m trust, so it’s not small. If they got all the money it would improve liquidity a bit, but I think the chances of them getting all the money would be relatively slim.”
Alternative emerging Europe funds
Investors looking for alternatives to Emerging Europe will find slim pickings among UK-domiciled funds.
The £90.6m Barings Emerging Europe trust, sitting on a discount of 11.7%, is the only other closed-ended product in the sector, according to the AIC. Its performance is not as strong as Blackrock Emerging Europe, which currently sits on a discount of 4.5%.
In the open-ended universe, Fidelity offers an £111.3m Emerging Europe, Middle East and Africa fund run by Nick Price. JP Morgan Asset Management runs a £59.2m Emerging Europe Equity fund.
Tsymbaluk said investors looking to stick to a pure emerging Europe remit could invest in Blackrock’s €838.4m Sicav strategy, which is also managed by Vecht. The fund has a bronze rating from Morningstar.
Emerging Europe funds have fallen out of favour over the last decade, Hughes said.
“It’s niche today, but 10 or 15 years ago emerging Europe was a really interesting area that people were investing strongly in because of the move towards the EU.”
In contrast, frontier markets are gaining a lot more traction, he said.
“When we speak to advisers we see that is an area where demand is picking up. A lot of people see a lot of emerging markets as becoming relatively mainstream.”
“In some respects, frontier markets are giving you characteristics that emerging markets gave you in your portfolio 10 or 15 years ago.”
