BlackRock Frontiers beats benchmark to trigger $3.5m fee

The 4.8%-yielding fund beats its customised benchmarks over the year to the end of September, triggering a fee equivalent to 10% of outperformance.

BlackRock Frontiers (BRFI ) has triggered a $3.5m performance fee as returns over the year beat its customised benchmark index. 

The £321m Citywire award-winning trust delivered underlying returns of 16.5% in US dollar terms over the 12 months to the end of September, pipping the MSCI Emerging Markets ex Selected Countries and MSCI Frontier Markets index benchmark, which returned 15.7%, annual results show. 

The performance fee is 10% of any outperformance, equivalent to 0.9% of the September net asset value (NAV) of $406.2m (£321m).

The board’s chair Katrina Hart added that as of October this year, BlackRock would charge a management fee based on NAV rather than gross asset value, thereby excluding the borrowing used to enhance returns. 

It also introduced a tiered fee structure, meaning that should net assets surpass £500m, the management charge will reduce from 1.1% to 1%.

BlackRock’s Citywire AAA-rated fund managers Sam Vecht, Emily Fletcher and Sudaif Niaz noted that the soaring gold price propelled the portfolio, with Turkish goldmine operator Eldorado Gold the best-performing stock over the period.

Elsewhere, National Bank of Greece was one of the main contributors to performance with strong first-half results showing that a 27% increase in core profits drove the share price, while Argentinian energy company Vista Energy had success in developing its Vaca Muerta shale site.

The trio also pointed to Indonesia’s largest Islamic bank Bank Syariah, which delivered strong profit growth in the first half and demonstrated a significant runway to gain share, as well as Vietnamese technology services provider FPT which rallied on the news of a co-investment with Nvidia and benefited from AI and the technology sector momentum more broadly.

Poor performers included multi-national technology services company EPAM Systems, which fell after giving weaker full-year guidance as it will take time for AI to impact its revenues.

‘We continue to hold the stock as we believe the company should benefit from a potential resolution of the war in Ukraine, with a significant number of its employees in the region,’ the managerial trio said. 

Adding to Bangladesh and Pakistan

They added to some of the smaller markets including Bangladesh and Pakistan where the investment cycles are receiving new leases of life.

Pakistan, which makes up 4.3% of the fund as at the end of October, was the top-performing market in Asia, returning 83% over the year thanks in part to the multi-billion bailout package from the International Monetary Fund (IMF), which the managers said will help the government ‘stabilise the economy’.

The government also announced an ‘ambitious’ budget which targets an increase in tax collection of 40% year-on-year to reduce the fiscal deficit. ‘Whilst substantial challenges remain, we are encouraged by the extent of reform envisaged,’ said the managers.

They explained that the Pakistani economy ‘has likely bottomed out’ and on this hope, initiated a position in Lucky Cement, which is one of the country’s largest conglomerates and lowest-cost cement producers trading on three times price to earnings multiple.

Bangladesh, which makes up 3.2% of the trust’s net assets, also caught the managers’ eye despite the market falling nearly 10% on the back of political upheaval.

Although regulators removed the price floor restrictions for most stocks in January 2024, ‘paving the way for broader market participation’, this news was superseded by the resignation of prime minister Sheikh Hasina in August following widespread protests.

‘Muhammad Yunus, the former Nobel Peace Prize-winner, took over as head of Bangladesh’s interim government,’ said the managers. ‘Bangladesh is a country with tremendous potential where a small amount of capital and investment can go a long way. A clean technocratic government should set the stage for a renewed investment cycle in Bangladesh.’

The fund opened up a position in commercial bank BRAC Bank, which reflects the managers’ ‘positive macro view on the country post the government change’.

The higher weighting to smaller markets came at the expense of exposure to Latin America, which was reduced. In Chile, Vecht, Fletcher and Niaz exited pulp and paper company Empresas CMPC.

Pulp prices rose on supply disruptions and the managers believe the ‘overall market will become increasingly oversupplied going forward’.

Oversupply was also the main factor in reducing lithium producer SQM and in Argentina, the managers became sceptical of president Milei’s ability to ‘successfully push through reforms’ and noted that ‘the monetary policies implemented seemed conflicted’, leading to the exit of both Vista Energy and oil company YPF.

Since the period end, the discount has narrowed from 8.5% to 7.4%. While the board did not buy back any shares over the year, a five-yearly exit helps to keep the discount narrow. The next realisation opportunity will be in early 2026.

Despite the strong long-term track record, with five-year shareholder returns of 42% beating the benchmark’s 17%, JPMorgan Cazenove analyst Christopher Brown maintained a ‘neutral rating’.

‘BRFI is well-differentiated, its tender mechanism provides a good discount control and it has performed well vs peers but its fee package as a whole remains too high for a fund with a listed equity portfolio in our view,’ Brown said.