Sam Vecht, manager of the BlackRock Frontiers Investment Trust, could be forgiven for feeling like a “professional tourist”. He has spent the last 18 years visiting emerging and frontier markets in search of interesting investments.
“I’ve covered about 70 countries for BlackRock – lovely places like Iran, Libya, Syria, I’ve been to all of them – and more mainstream places like South Africa, Mexico and Brazil,” he told Sub35 members at an event in Shoreditch, London. “Some places I discover interesting stuff and some places it’s a total waste of time, but you don’t know that until you’ve been to these places and met the companies.”
On the ground, Vecht meets not only the companies, but also their customers, suppliers and competitors. “Everybody lies to us – that’s what happens when people are trying to sell you their stories,” he said.
Broadly speaking, he contends that investors have the wrong idea about investing in these markets. “People love stories and themes… but that’s not how you make money in emerging markets. There is a golden rule in emerging markets; buying themes and stories and demographics – the emergence of the middle class – it’s all wonderfully true, but totally useless in making money.”
Vecht put that down to two reasons. Firstly, emerging market countries are less stable. Yemen and the Democratic Republic of Congo have among the fastest population growth in the world but are not necessarily great places to invest.
Secondly, the time to consider investing in emerging and frontier markets is not when most people would expect – when the currency is cheap, equities are cheap and economic growth is poor.
“Never get tempted to think there’s any correction between GDP [gross domestic product] growth and market performance. There’s an inverse relationship, which really surprises people.
“The quicker a country grows, typically it goes to the heads of the [company] management, the heads of the politicians and they overinvest at exactly the wrong point in the cycle and returns fall. Buying fast GDP growth is a pretty good way of losing money over time.”
Loss avoidance
Vecht highlighted loss avoidance as being key to successful investing in emerging markets.
“Emerging and frontier markets are massively volatile. There is no such thing as a ‘safe’ emerging market. It’s like there’s no such thing as ‘safe’ off-piste skiing,” he said. “The most dangerous thing you could ever hear in emerging markets or frontier markets is someone telling you this is a ‘safe, clear theme or story’.”
To mitigate risk, BlackRock Frontiers, which he has managed since its launch in December 2010, is diversified across many regions and 20 countries. The result is a collective investment that has far lower volatility than the FTSE All-Share.
“People think: ‘One second, you invest in all these ridiculous countries. How can this be a low volatility investment?’ That’s because even if Nigeria is volatile and Pakistan is volatile and Argentina is volatile, when you put them together, they don’t move together.
“Each one of these markets can have a crisis, but long term these are great places to invest in because the companies are growing fast.”
The trust offers investors an exit every five years at net asset value less costs, but at the first exit opportunity in early 2016, only 4% of investors choose to exit.