The AFC Asia Frontier Fund (AAFF) USD A-shares gained +2.4% in January 2018. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+8.9%), the MSCI Frontier Markets Net Total Return USD Index (+5.7%), and the MSCI World Net Total Return USD Index, which was up +5.3%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +74.8% versus the MSCI Frontier Markets Asia Net Total Return USD Index, which is up +115.6%, and the MSCI Frontier Markets Net Total Return USD Index (+69.9%) during the same time period. The fund’s annualized performance since inception is +10.0% p.a. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.87%, a Sharpe ratio of 1.10, and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.32, all based on monthly observations since inception.
The year began on a positive note for the fund with gains being led by Pakistan. With the KSE-100 Index beginning the year at valuations which were close to a five-year low and continued positive political developments, it was not a surprise to see the KSE-100 Index rally by 8.8% for the month making it one of the top performing markets in Asia. Gains this month for the fund in Pakistan were led by a consumer appliance company, a bank and cement stocks, all of which have extremely attractive valuations. On the political front, the Senate elections are expected to be held in the first week of March 2018, which will give investors more comfort with respect to the upcoming national elections in August 2018, as the political events over the past six months had led to some amount of political uncertainty.
Though macro stability is still not in the comfort zone and barring the political noise, economic activity continues to progress with auto sales, domestic cement sales and private sector credit showing strong growth. The Pakistani Rupee depreciation in December 2017, as well as higher crude oil prices, is expected to lead to an uptick in inflation this year which led the Central Bank to increase benchmark rates by 25 basis points this month, with consensus expecting another 150 basis point increase over the next 18 months. The rising trend of interest rates should not have a significant impact on the economy as a 150 basis point increase would still keep rates below the highs seen in 2011-2013.
Bangladesh also led gains this month for the fund, despite the broader Bangladeshi market correcting by 3.3%, as the fund’s pharmaceutical, consumer staple and telecom holdings did well on the back of good quarterly numbers. Banking stocks led the correction in Bangladesh as the Central Bank looks to cool down credit growth by reducing loan to deposit ratios which could impact the banking sector’s profit margins, leading to a sell off over the past month in these stocks. Further, investor sentiment is somewhat dampened by the political tension due to the conviction of the leader of the opposition party, Khaleda Zia. We have witnessed such political events in Bangladesh in the past and though near-term volatility on the ground, as well as in the stock market, could increase, we continue to like the long-term story of Bangladesh due to its large untapped consumer market.
Vietnam continued its bull run into 2018 with the VN Index gaining 12.8% this month, led by large caps whose valuations have reached regional comparisons with not much room for earnings disappointment. For the fund, gains in Vietnam were led by an industrial park operator, a construction services company, and an air cargo terminal operator. The the fund exited a mid-end real estate developer and based on our visit to Ho Chi Minh City during the month, we initiated a positon in an air cargo terminal operator which is only one of two operators at Tan Son Nhat airport (Ho Chi Minh City) and has the second highest market share. This company is expected to see its volumes grow due to the growth of export/import trade in Vietnam and also due to the fact that this is the only player with available area to expand capacity in the near term. We also initiated a positon in an airport services company which runs retail shops and restaurants at important airports and also provides catering services to airlines. This company is also looking to expand into other airports and provides exposure to the robust growth in foreign tourists and domestic passengers going through Vietnam’s airports.
Gains in Sri Lanka were led by a consumer conglomerate and the recent signing of the free trade agreement between Sri Lanka and Singapore can be a long term positive as Sri Lanka is also looking to sign free trade agreements with India and China.
Mongolia showed continued signs of recovery last month and on 18th January Moody’s upgraded Mongolia’s long-term issuer rating to B3 from Caa1. During the month, the Prime Minister and Minister of Mining also spoke out separately on the need to connect Tavan Tolgoi, the country’s 8bln ton coal deposit, to China via rail, in addition to building a mine-mouth power plant to supply Rio Tinto’s Oyu Tolgoi copper mine with electricity. Earnings season for companies listed on the Mongolian Stock Exchange has begun and we are expecting positive results, specifically for commodity producers, and will be looking for signs that the macro recovery is trickling down to the real economy in the consumer related companies results.
The best performing indexes in the AAFF universe in January were Vietnam (+12.8%), Pakistan (+8.8%), and Iraq (+4.8%). The poorest performing markets were Laos (-4.2%) and Bangladesh (-3.3%). The top-performing portfolio stocks this month were a Mongolia bakery company (+35.4%), a Pakistani consumer appliance company (+27.9%), a Mongolian coal miner (+22.6%), a Vietnamese medical equipment distributor (+22.4%), and a Pakistani pharmaceutical company (+20.3%).
In January, we bought an air cargo terminal operator and an airport services company in Vietnam and exited a real estate developer in Vietnam. The fund added to existing positions in Mongolia, Pakistan, Papua New Guinea, and Vietnam while partially reducing the fund’s holding each in one company in Mongolia and Vietnam.
As of 31st January 2018, the portfolio was invested in 115 companies, 1 fund and held 1.3% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.3%) and a pump manufacturer from Vietnam (3.1%). The countries with the largest asset allocation include Vietnam (27.1%), Pakistan (21.5%), and Bangladesh (18.2%). The sectors with the largest allocations of assets are consumer goods (29.6%) and industrials (17.2%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 14.20x, the estimated weighted average P/B ratio was 2.73x, and the estimated portfolio dividend yield was 3.59%.