The AFC Asia Frontier Fund (AAFF) USD A-shares lost -1.5% in February 2018. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (-0.8%), had a similar performance to the MSCI Frontier Markets Net Total Return USD Index (-1.5%), and outperformed the MSCI World Net Total Return USD Index, which was down -4.1%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +72.2% versus the MSCI Frontier Markets Asia Net Total Return USD Index, which is up +113.9%, and the MSCI Frontier Markets Net Total Return USD Index (+67.4%) during the same time period. The fund’s annualized performance since inception is +9.6% p.a., while its YTD performance stands at +0.9%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.85%, a Sharpe ratio of 1.05, 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.
February was another month where investors got nervous about rising interest rates in developed markets, and global markets faced a steep correction. However, Asian frontier markets, as has been the case in the past, fared better and did not correct as much, with some of our markets bucking the trend, such as Iraq, which witnessed a rally of 12.7% in local currency. Lower foreign investor participation, domestic driven economies, and under researched markets are some of the main reasons why our fund universe saw a lower decline this month compared to global markets, which helped with relative performance compared with global indices.
In the first half of the month, amongst the fund’s universe, Vietnam bore the brunt of the correction in global markets with the Ho Chi Minh VN Index declining 4.6% before the start of the Lunar New Year break, but recovering towards the end of the month thanks to the banking sector continuing to rally. Fundamentals of the economy remain strong, however, with valuations of mid and small cap companies continuing to offer more value compared to large cap stocks, which have experienced a run up in valuations over the past year. For the fund’s other larger markets, this was a month of political developments.
Pakistan continued to see political noise in the run up to national elections this summer as the Supreme Court disqualified former Prime Minister Nawaz Sharif from heading his party, the PML (N). Both the decision by the Supreme Court, as well as the follow-up decision by the PML (N) electing Shehbaz Sharif, the younger brother of Nawaz Sharif, as the head of the PML (N), did not come as a surprise. Nevertheless, volatile global markets and political uncertainty, due to the Supreme Court decision, impacted market sentiment. This decision did not affect the upcoming Senate elections which went ahead as scheduled on 3rd March 2018 with PML (N) gaining as expected the highest number of seats. This should give more confidence to the market with respect to having timely national elections in August 2018.
The Bangladeshi market continued to remain weak due to some amount of political uncertainty as the leader of the opposition, Khaleda Zia, was sentenced to five years in prison which could lead to some amount of political uncertainty in the run up to the national elections at the end of 2018. The fund’s Bangladeshi holdings however have done well this year, as it does not hold any banks whose stock prices have corrected the most this year on the back of worries regarding declining net interest margins and a new banking directive. The fund’s Bangladeshi holdings have so far had a positive return thanks to exposure to consumer staple, pharmaceutical and telecom stocks.
The Sri Lankan coalition government witnessed a political setback as the former President Mahinda Rajapaksa’s party won a majority of the votes in the local council elections. Therefore, it would not be surprising if the current government does not implement all of its tax related measures announced in the recent budget, as well as loosen the fiscal strings in order to cushion consumer incomes and recover some lost ground prior to the parliamentary elections at the end of 2019.
Mongolia is continuing its slow but steady recovery as most listed companies have reported full year earnings and whose results indicate a modest improvement in the economy during 2017. The past year has seen over a 70% rally in the index as large cap consumer plays and exporters continue to perform. The one wild card for the economy is when the constraints surrounding the Gants Mod border crossing will be eased as there remain issues with coal bearing trucks being able to move through as seamlessly as before last summer. It has been reported in the media that 1,000 trucks per day are now allowed to cross the border into China, though it seems the real number is closer to 250. In order for Mongolia’s economic recovery to continue, resolving its export bottleneck is paramount. The visit of Prime Minister, U. Khurelsukh to Beijing from 10th to 13th April will be telling on this matter. Further, on 6th February the IMF announced it had reached a staff-level agreement with the Mongolian government on the 3rd review of the Extended Fund Facility program. The IMF also revised its projections for GDP, with 2018 and 2019 projections of 5% and 6.3%, respectively.
The best performing indexes in the AAFF universe in February were Iraq (+12.7%), Cambodia (+4.1%), and Sri Lanka (+1.2%). The poorest performing markets were Bangladesh (-3.9%) and Mongolia (-3.2%). The top-performing portfolio stocks this month were a Mongolian oil exploration company (+45.6%), a Vietnamese telecom equipment company (+40.7%), a Mongolian consumer discretionary company (+22.2%), a Mongolian internet company (+21.2%), and a Mongolian duty-free chain store (+19.8%).
The fund added to existing positions in Mongolia and Vietnam while partially reducing the fund’s holding in three companies in Vietnam and exiting a Pakistani leasing company.
As of 28th February 2018, the portfolio was invested in 114 companies, 1 fund, and held 2.2% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.5%) and a pump manufacturer from Vietnam (3.3%). The countries with the largest asset allocation include Vietnam (27.0%), Pakistan (19.9%), and Bangladesh (18.3%). The sectors with the largest allocations of assets are consumer goods (29.3%) and industrials (17.0%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 13.35x, the estimated weighted average P/B ratio was 2.70x, and the estimated portfolio dividend yield was 3.61%.