ii Super 60 update: BlackRock Frontiers Investment Trust

BlackRock trust removed from list, while four other funds and trusts under formal review.

interactive investor, the UK’s second-largest direct to consumer investment platform, has removed BlackRock Frontiers Investment Trust (LSE:BRFI) from its Super 60 rated funds list following an extended bout of underperformance.

The investment trust, which featured on the ii Super 60 list as an emerging markets equities adventurous pick, has underperformed in recent history returning -31.21% over the last three years (to 31 August 2020) and 13.22% over five years.

This trails the performance of the average trust in the Global Emerging Markets sector over the same time periods (-7.35% and 40.08%, respectively) as well as the MSCI Frontier Markets index benchmark (-7.39% and 34.04%).

In recent years, frontier markets have underperformed emerging and developed markets, which has negatively impacted the performance of BlackRock Frontiers and funds that invest exclusively in the region.

When conducting a review of the small universe of other actively managed frontier market funds and trusts, our analysis found all (to the end of July) had underperformed the MSCI Frontier Markets index over three and five years. Therefore, going forward we believe it would be more prudent for investors seeking exposure to frontier markets to consider a broader emerging market option that includes frontier markets in their investment universe.

The decision was made in line with our Super 60 methodology - which is monitored continuously for events which include, but are not limited to, extended periods of underperformance and fund manager moves. The interactive investor Investment Selection Committee conducted a formal in-depth review of the trust, which included asset class, sector and peer group analysis as well as meeting the manager and the team.

Dzmitry Lipski, head of funds research at interactive investor, says: “We acknowledge that frontier markets have struggled in recent history, but believe that due to an extended period of unsatisfactory performance the trust is no longer suitable to be an endorsed option for our customers.

“With the approval from the board, the trust decided to expand their investable universe from April 2018. The new investment universe includes the 16 smallest countries of the MSCI EM index + Frontier + Saudi Arabia. The reason for this is the constant evolution of the MSCI Frontier Markets index and continuous reclassification of frontier countries into emerging.

“The managers identified eight countries that dominate emerging market funds, the so-called Everyone's Eight, leaving a long tail of 40 markets, known as the Forgotten Forty. “Everyone's Eight (Brazil, China, India, South Korea, Mexico, Russia, South Africa, and Taiwan) accounts for about 85% of global emerging market funds. They ignore these eight countries completely, instead focusing on finding hidden opportunities in the Forgotten Forty. As a result, they have created bespoke benchmark index.

“The trust underperformed its bespoke benchmark as well as both the MSCI Frontiers and Emerging Market indices. In addition, attribution analysis for the last 12 months shows the underperformance was primarily driven by poor stock selection. The trust’s performance under the previous mandate (December 2010 to March 2018) was strong and well ahead of their benchmark, the MSCI Frontier Markets index (92.5% vs 62.6%).”

interactive investor has also placed a number of funds under review: Schroder Income; Utilico Emerging Markets (LSE:UEM); Templeton EM Smaller Companies; BMO Commercial Property Investment Trust (LSE:BCPT). The move is not a recommendation to sell. None of the opinions provided is a personal recommendation, therefore you should ensure any investment decisions you make are suitable for your personal circumstances. 

interactive investor’s Investment Selection Committee will decide to either retain or replace the funds or investment trusts within the Super 60 listing. Our goal is to reach a decision within three months of the date when the investment was placed under formal review. This gives us enough time to discuss our concern with the relevant fund manager and/or allow an opportunity for improvement.

Other Super 60 selections currently under formal review

TheTempleton Emerging Markets Smaller Companies Fund is included in the ii Super 60 list of rated funds as a Smaller Companies option within the Emerging Markets category. In line with our stated methodology, the Investment Selection Committee decided to put the fund under formal review on 3 August 2020 due to performance concerns. As part of the formal review process, we will conduct an in-depth analysis of the investment team and methodology, performance attribution and current shape of the portfolio, as well as the outlook for the fund. (3 August 2020)

TheUtilico Emerging Markets Investment Trust is included in the ii Super 60 list of rated funds as an Income option within the Emerging Markets category. In line with our stated methodology, the Investment Selection Committee decided to put the fund under formal review on 5 August 2020 due to performance concerns. As part of the formal review process, we will examine the team and the investment process, detractors for performance, current portfolio positioning and outlook for the trust. (5 August 2020)

The BMO Commercial Property Investment Trust is included in the ii Super 60 list of rated funds as an Income option within the Property category. In line with our stated methodology, the Investment Selection Committee decided to put the trust under formal review on 23 July 2020 due to continued uncertainty around income payments and its persistently wide share price discount to net asset value. The investment trust suspended its monthly dividend payment in April and at the time of announcing the formal review (23 July) there had not been any official announcement as to when dividends will be resumed.

As part of the formal review process, we will conduct an in-depth appraisal of the investment process, the shape and quality of the portfolio, prospects for resumption of dividend payments, and will consider the various factors that contributed to the significant discount that the trust is trading at.(23 July 2020)

Since putting the trust under formal review, in early August BMO Commercial Property reintroduced the dividend, but at 50% lower than the previous rate.

Update: 20 August 2020
The Investment Selection Committee notes the recent publication of the net asset value return figures for the second quarter of 2020, in which BMO Commercial Property Trust recorded a 2.9% decline for the quarter ended 30 June. We also note that while the backdrop remains challenging for property as an asset class rent collection improved for the trust in the second quarter, at 83% versus 74% for the first quarter. We also welcome the return to paying a monthly dividend, albeit at a reduced rate, from August onwards.

Our team is actively investigating the performance, discount to net asset value and management of the trust, and will come up with further details in due course

The Schroder Income Fund is included in the ii Super 60 list of rated funds as an Adventurous option within the UK Equity Income category.

In line with our stated methodology, the Investment Selection Committee decided to put the fund under formal review on 3 August 2020 following an extended period of underperformance. Our in-depth review process will consider the various factors that contributed to the return profile of the fund, and will include a review of the team, investment process and portfolio positioning. (3 August 2020)