BlackRock Frontiers (BRFI ) manager Sam Vecht has reduced exposure to Saudi Arabian financials where he believes margins have peaked, and is ploughing money into Southeast Asia which is benefiting from a ‘recalibration’ of supply chains.

Proving why it was the Citywire Investment Trust award winner in the global emerging market equities category last month, the £269m trust produced a total return of 25.1% in the year to September, storming ahead of the 5% increase in its benchmark, which is a composite of the MSCI Emerging Markets, MSCI Frontier Markets, and MSCI Saudi Arabia indices.

Financials were of broad benefit to the fund but the biggest laggard was Saudi National Bank, where shares dropped 28% over the year after making a non-core investment in Credit Suisse which had to be written off.

Vecht, who runs the trust with Emily Fletcher and Sudaif Niaz, said the market ‘penalised the bank for poor capital allocation and the domestic corporate credit growth picture remains murky at best’ but despite this the bank still remains his preferred exposure to Saudi Arabian financials.

However, he reduced his overall exposure to the Middle East, which suffered from the outbreak of war between Hamas and Israel after the results period ended, although it is still the largest geographic weighting in the portfolio at 15.6% as at the end of October. 

‘In the banking sector in particular, we believe margins have peaked out, liquidity is tight, and valuations are high overall,’ he said.

‘We rotated some financials exposure from the Kingdom to United Arab Emirates by exiting our holding in Riyad Bank and rotating into Abu Dhabi Commercial Bank. We also exited Saudi British Bank on a similar view.’

Vecht said he was finding value in other Saudi Arabian sectors. He has increased exposure to petrochemical names and initiated a position in Saudi Basic Industries where ‘margins are at 10-year troughs and as the company is still free cashflow positive, it should do well on an eventual economic upswing’.

He has also spotted value in Southeast Asia, specifically in companies ‘benefiting from the recalibration of supply chains’.

The Philippines, which is 8% of the fund, has been a particularly fruitful area, with Vecht initiating positions in sectors spanning real estate to financials. This included property developer Ayala Land as it has ‘meaningfully corrected and we see a potential turnaround in the local real estate cycle’.

‘We also recently reinitiated a position in Bloomberry Resorts, a Philippines-based resort and casino operator, on the view that strong volume growth will continue and that leverage is likely to fall from current levels,’ he said.

Malaysia, which makes up 5.1% of the fund, is another region that Vecht likes as it is benefiting from changes to supply chains post-pandemic. The manager said regional semiconductor and tech packaging is moving away from China and Taiwan amid growing geopolitical risk.

There are also opportunities in Bangladesh, just 0.5% of the fund at present, which is the world’s second largest garment manufacturer.

‘We believe the country can use its manufacturing expertise to gain market share in other manufacturing sectors,’ he said.

‘Our experience tells us that there are real benefits to invest in an emerging market when the country is in real need of foreign capital and before other foreign investors get there – Bangladesh meets those criteria.’

However, Vecht said there were challenges that need to be resolved, as the currency needs to weaken and the ‘floor on stock market prices needs to be dismantled’.

Indonesia is the largest absolute weight in the portfolio and the second largest geographic weighting at 13.6%, and Vecht likes its ability to grow due in part to beneficial policymaking, including the banning of raw ore.

‘Indonesia has increased the value of its mineral exports, enhanced its domestic processing and refining capabilities, and created more economic opportunities for its people,’ he said.

Smaller markets, including Pakistan, Sri Lanka, Kenya, and Nigeria have started to ‘pique our interest again’ despite being ‘relatively un-investible for the last few years’ due to capital controls.

‘Year-to-date, we have now seen more orthodox steps to let the FX find a market an equilibrium, through reducing intervention and import controls’, with countries increasing rates and securing packages from the International Monetary Fund.

‘All these measures will help rebalance economies and will allow markets to function properly,’ he said.

‘If they follow through on this there could be some interesting investment opportunities in this cohort of countries.’