Blackrock manager Sam Vecht has said it was awkward for him when shareholders in the Emerging Europe trust voted to wind up the closed-ended fund at the end of 2018 and that he didn’t understand why it traded at a much wider discount than his Frontiers trust.
In June 2018, 60.75% of share capital voted in favour of winding up the Emerging Europe trust Vecht co-managed with Chris Colunga. At a vote in November, 31.4% of investors decided to roll over into the Frontiers trust he co-manages with Emily Fletcher.
The £46m worth of C shares from Emerging Europe that merged into the Frontiers trust in mid January provided a “useful” boost to the investment trust, but Vecht said at a press briefing that the episode had been awkward for him.
He said: “We said we would give a cash exit to shareholders at the end of five years. I fundamentally believe, although it was awkward for me, this is shareholder democracy and when shareholders want something they vote for it and it is absolutely our duty to give it to them. That’s a legal duty, an ethical duty and I feel that very, very strongly.”
The £459.8m Frontiers trust has the same discount mechanism. “In January 2021, shareholders will have the ability to have a cash exit if they believe we haven’t done a good job. I may disagree with their conclusion but they will be able to get their money out,” he said.
It is currently trading at a 2.3% premium, according to the Association of Investment Companies, in contrast to the Emerging Europe trust, which typically traded at a double-digit discount. “It was somewhat strange to be running two investment trusts at the same time, one that was trading at a 10 to 12% discount and the other was trading at a 2% premium when it’s the same team,” he said.
Frontier markets liquidity
The £46m boost to the trust was not the largest amount of cash it’s had to deploy with it taking on £63m in 2013 through a capital raise.
Due to liquidity, Fletcher says they are committed to running the strategy only via the closed-ended structure.
Vecht also manages an open-ended Emerging Europe Sicav, which he says is more suitable than frontier markets to run as an open-ended strategy due to the liquidity of the underlying assets. “Nigeria trades at about $8m a day of the entire market whereas Russia trades about $500m a day. Nigeria isn’t alone in that regard, Sri Lanka doesn’t trade particularly. Oman, Lebanon aren’t exactly trading buckets these days.”
Liquidity drying up in global markets has made frontier markets less attractive for the financial industry to look at, he said. That has been compounded by Asia and China increasingly dominating emerging market indices so that research resources are focused on those geographies at the expense of smaller markets.
In March 2018, Frontiers trust shareholders voted to expand the universe of the trust to the entire emerging and frontiers market excluding the largest eight countries. Vecht and Fletcher refer the countries in their bespoke MSCI index as the “forgotten 40”.
The average country weight of US-domiciled GEM funds based is 85% dominated by the eight largest markets: China, South Korea, Taiwan, India, Brazil, South Africa, Russia and Mexico.
In contrast, the largest market in the Frontiers trust universe is Indonesia, which only accounts for around 2.5% of the average GEM fund, says Fletcher. “If Indonesia was to do very well and outperform by about 20% then the contribution of Indonesia to performance would be somewhere around the threshold of materiality, around 50 basis points,” she says.
“It’s very difficult for those countries to add meaningful to the average emerging markets fund.” The countries in the Frontiers trust’s universe are much less correlated to other markets, plus their lack of correlation with each other smooths out volatility, she says.
Volatility was 1.6% based on weekly returns since inception in December 2010 compared to 1.9% in the S&P 500, 2.2% in the FTSE All Share and 2.4% in the MSCI Emerging Markets index.
