Investors looking for long-term growth need to focus on fundamentals and beware of investing in tech companies that might change the world but have no earnings and bad corporate governance, according to BlackRock’s Sam Vecht. 
Vecht (pictured), manager of the £382.8m BlackRock Frontiers Investment Trust, said the short-term investment trends seen during the Covid-19 pandemic are not suitable for long-term investors
He said: “If our business model had been to go to clients and say… ‘we invest in companies that have no earnings, have bad corporate governance and do multiple capital raises’, that would have been a really great strategy.
“But it’s not a very sensible strategy on a long-term basis.”
Vecht highlighted the performance of the Goldman Sachs Non-Profitable Technology index, which started to soar from the middle of 2020 and has continued to perform well in 2021, as “symbolic” of the times.
“I’m sure individual companies [in a portfolio] having no earnings would be a good strategy because they are going to go and change the world. But that being your [whole] portfolio? That’s probably not a great idea,” the trust manager said.
“At some point, we’ll wake up and smell the coffee and realise that perhaps we’re going to have another crash… when stuff with no earnings keeps going up.”
As such, the BlackRock manager said investors will need to look for areas where growth is more sustainable and durable for the longer term. And for him, that means frontier markets.
“For medium- and long-term investors, it’s not just judging what’s going to happen in the next three weeks and which particular asset has gone up the most of the last month-and-a-half,” he said
“There’s a whole generation of people who got into investing in the last six months because they’ve been stuck at home with nothing to do and speculating.”
He continued: “Once we’ve had this sort of ‘sugar rush’, I think people are going to go back and – slightly more intelligently – look for where there is endogenous growth. And I think these countries really have that.”
While there had been a belief that frontier markets would be badly hit by Covid-19 – given the lack of health resources, poverty and greater crowding – this was not the case.
“Obviously, there have been deaths, there have been Covid cases, but these countries that we’re looking at, broadly, have coped with the virus from a medical perspective far better than we have done in the UK or in western Europe,” he said
Although it’s unknown why the coronavirus has taken less of a toll in frontier markets, said the manager, the economic outcome across the range of different markets has been more straightforward.
“The rebound has been fairly V-shaped in most of these countries,” he said. “They’re better economically because the amount of debt taken on during this period of time has not been like that in the UK or in western Europe, where people have borrowed enormous amounts from the future to pay for today’s consumption.
“They haven’t really nationalised the payroll in many of these countries. There has been some government support, but nothing like the sort of the what we’ve seen in western Europe or in the US.”
Developed markets will likely face higher taxes, said Vecht, to pay for the unprecedented levels of support during the pandemic.
Despite outperformance of the IT Global Emerging Markets sector – a broad emerging markets sector – during Q2 and particularly strong performance in Q4 last year, the BlackRock Frontiers trust ended 2020 down 5.38 per cent compared with an 8.22 per cent for the peer group.
Performance of trust vs sector in 2020
Source: FE Analytics
Vecht said he had reduced the beta in the fund “quite aggressively” in January and February last year as the seriousness of the coronavirus became apparent, before adding back to it in March.
“Our timing was quite good in calling the bottom but then nothing really bounced for us,” he said. “And then, as luck would have it, things went much better for us in October and November.
“So, many of the things that we bought in March and April had a very strong second half, going up 30 40 per cent.”
Nevertheless, with frontier markets typically trading 20-30 per cent cheaper than they have been on average over the past five-to-10 years – compared with developed markets stocks trading at a 30-40 per cent premium relative to historic levels – there are still a number of opportunities.
“I am a strong believer that the world of 2021 will not be like the world of 2020,” Vecht said. “And what worked in 2020 is probably not the right long-term portfolio for 2021.”
As the trust's annual general meeting in February approaches and a tender offer for investors to realise their investment after the end of the most recent five-year period, Vecht said he remains bullish about the long-term outlook for frontier markets as the global economy recovers from the coronavirus.
Over the past five years, BlackRock Frontiers has made a total return of 55.51 per cent compared with a gain of 78.29 per cent for the average peer.
Performance of trust vs sector over 5yrs
Source: FE Analytics
It should be noted that the trust – which Vecht manages alongside Emily Fletcher – is measured against a bespoke benchmark: MSCI Emerging Market ex Selected Countries + Frontier Markets + Saudi Arabia. According to the most recently available factsheet, the trust had made a return of 32.4 per cent on a net asset value basis against the benchmark’s 38.6 per cent in the five years to end-November 2020.
The trust is currently trading at a 2.5 per cent discount to net asset value (NAV) and is 9 per cent geared, according to data from the Association of Investment Companies (AIC), as at 27 January 2021. It has ongoing charges of 1.4 per cent.