Aberdeen Frontiers Trust to be Wound Up

Shareholders set to get their money back at net asset value as Aberdeen trust has underperformed

James Gard 2 July, 2020 | 12:03AM
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Exit sign

The £28 million Aberdeen Frontier Markets Trust (AFMC) is to be wound up, citing operational costs, weak prospects for frontier markets and ongoing underperformance against the benchmark.

Morningstar’s head of manager research, Jonathan Miller, says it’s not unusual for smaller investment trusts to be closed. “The ongoing viability of small trusts does get considered by their boards and often it’s a mix of size and underperformance that come to the fore. In June, we saw India Capital Growth and VPC Speciality Lending survive shareholder ballots,” he says.

At an extraordinary general meeting (EGM) in October 2018, shareholders in the Aberdeen trust approved a new policy allowing them to exit their investments if the trust had underperformed the benchmark, the MSCI Frontier Markets Index, over a two-year period from July 1, 2018 to June 30, 2020.

This forms part of what’s known as a discount control policy, a unique feature of investment trusts. In this case, investors get their money back (minus costs) at the Net Asset Value (NAV), which is currently around 10% higher than the share price, as the trust is trading at a discount – often a sign that the trust or area it invests in is out of favour.

Frontier Markets Underperformed

What is a frontier market? They are countries that are considered less economically developed than emerging markets such as China and India, but are on their way to developing emerging market status. For example, oil rich kingdom Saudi Arabia was promoted from frontier to emerging market in 2018. But, recent performance has been underwhelming and the higher risk taken on by investors has not been matched by higher rewards.

Indeed, frontier markets have been in the eye of the storm this year. The response of many countries in the region to the Covid-19 crisis has been hampered by weaker healthcare systems, while the flight to the US dollar has made their debt more expensive to service. The collapse in the price of oil also hit Opec countries such as Kuwait, which makes up 36% of the MSCI Frontier Markets Index.

The Aberdeen trust is one of just three closed-end funds in the sector. Its manager, Devan Kaloo also manages the Neutral-rated ASI Emerging Markets Equity Fund. Launched in 2007, it has delivered annualised returns of just 1% of the past decade and the share price is down 13% year to date.

The trust's two peers, BlackRock Frontiers (BRFI) and Jupiter Emerging & Frontier Income (JEFI), have Morningstar Ratings of two and one stars respectively. In the first six months of the year, the trusts are down 25% and 20% respectively.

In the latest market update, the BlackRock Frontiers trust managers say that valuation levels in frontier markets are now close to levels seen in the last financial markets. “We remain positive on prospects of select economies, where policy makers have taken upfront, prudent measures to contain Covid-19, where the FX debt situation is relatively manageable, that will benefit from lower oil price and whose currencies are not over-valued,” say co-managers Sam Vecht and Emily Fletcher.

Morningstar has asked Aberdeen for comment. 


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James Gard  is content editor for Morningstar.co.uk