The AFC Asia Frontier Fund (AAFF) USD A-shares declined -3.5% in April 2018. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (-6.7%), but underperformed the AFC Adjusted Frontier Asia Index* (-2.6%), the MSCI Frontier Markets Net Total Return USD Index (-3.1%), and the MSCI World Net Total Return USD Index, which was up +1.1%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +63.7% versus the AFC Adjusted Frontier Asia Index, which is up +51.4%, and the MSCI Frontier Markets Net Total Return USD Index (+63.6%) during the same time period. The fund’s annualized performance since inception is +8.4% p.a., while its YTD performance stands at -4.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.00%, a Sharpe ratio of 0.90 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.33, all based on monthly observations since inception.
This month saw a heavy correction in Vietnam, which impacted the overall fund performance. There were many theories behind this correction of close to 11% in the Ho Chi Minh City VN Index, but as we discussed in previous manager comments, valuations of large cap stocks were beginning to look stretched relative to the region so this correction should not come as a surprise given the run up in valuations and stock prices of large caps over the past year. Fundamentally, the economy continues to remain on a strong footing and offers greater macro stability compared to other countries in the region, while valuations in the mid and small cap space remain attractive, as has been discussed previously in our manager comments. This correction also displayed the skewness of the MSCI Frontier Markets Asia Index towards large cap Vietnamese names which account for 79% of the index. However, given the fund’s diversified approach of investing across the market cap range, the correction had a lower impact on relative performance of the fund.
During April, the fund invested into the largest airport operator in Vietnam and we believe this is one of the better longer-term stories in the country as Vietnam is expected to see an increase in both foreign tourist arrivals, as well as in domestic travelers. With capacity expansions being planned across multiple airports, while having the pricing power, as well as the ability to increase its non-aeronautical revenues, this company we believe is a good proxy for Vietnam’s future economic growth.
In Pakistan, we saw the announcement of the government’s annual budget which reduced taxes for both corporations and individuals. However, we are not sure how sustainable these tax reductions are given the fiscal position of the country, as well as with a new government coming into office this summer which would need to take actions with respect to shoring up tax revenues going forward. A tax amnesty scheme was also announced by the government which will allow for undeclared assets, both abroad as well as within the country, to be brought into the mainstream economy at tax rates of 2-5%. This move could help increase foreign reserves of the country, but it will be a “wait and see” situation as to how successful this scheme will turn out to be. On a company level, our biggest position in Pakistan – a motorcycle manufacturer – announced good results for the quarter and the fiscal year, while announcing a further capacity expansion plan.
Sri Lanka is undergoing a consolidation in its mobile telecom industry as the third and fifth largest players by subscriber market share announced a possible merger. This is not surprising as five operators appeared to be too many for the market size of Sri Lanka. Theoretically, this should be positive for the largest mobile telecom operator, which the fund holds, as pricing for services should stabilize. Further consolidation cannot be ruled out as the smallest player in the market will now be at a disadvantage in terms of market share and spectrum.
Mongolia’s Prime Minister, U. Khurelsukh, made his first official visit to China from 8th-12th April to attend the Boao Forum for Asia, as well as to meet Chinese Premier Li Keqiang to improve ties between the two countries. He mainly focused on improvement in relations related to road, rail and utility infrastructure investment, as well as resolving a 10-month long bottleneck at the Gants Mod border crossing through which Mongolia exports the majority of its coal and copper. Following his trip, the Prime Minister visited the Inner Mongolia Autonomous region of China, followed by a visit to the Tavan Tolgoi coal basin in Mongolia. Shortly after his trip, China agreed to open an additional border gate to increase the daily flow of coal-bearing trucks into China. If the border remains open, then this would provide much needed support to the Mongolian economy as coking coal prices remain high off the back of rising capacity utilization rates in China’s steel mills.
The best performing indexes in the AAFF universe in April were Bangladesh (+2.5%), Pakistan (+0.8%), and Sri Lanka (+0.8%). The poorest performing markets were Vietnam (-10.6%) and Iraq (-6.2%). The top-performing portfolio stocks this month were: a Pakistan motorcycle manufacturer (+20.2%), a Vietnamese beverage producer (+16.7%), a Mongolian tour operator (+16.4%), a Mongolian concrete producer (+15.8), and a Pakistani automotive battery company (+15.3%).
In April, we added to existing positions in Cambodia, Mongolia, and Vietnam. We exited a Mongolian footwear producer, a Sri Lankan conglomerate, and three Vietnamese holdings: a brewery, a medical equipment trading company and an airport service company.
As of 30th April 2018, the portfolio was invested in 107 companies, 1 fund, and held 6.4% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.0%) and a pump manufacturer from Vietnam (3.5%). The countries with the largest asset allocation include Vietnam (25.0%), Bangladesh (18.7%), and Pakistan (16.2%). The sectors with the largest allocations of assets are consumer goods (28.3%) and industrials (17.1%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 13.74x, the estimated weighted average P/B ratio was 2.79x, and the estimated portfolio dividend yield was 3.64%.