The AFC Asia Frontier Fund (AAFF) USD A-shares declined −0.4% in June 2019 with a NAV of 1,309.34. The fund outperformed the AFC Frontier Asia Adjusted Index (−9.3%) while performance was similar to the MSCI Frontier Markets Asia Net Total Return USD Index (−0.4%), however the fund underperformed the MSCI Frontier Markets Net Total Return USD Index (+2.3%) and the MSCI World Net Total Return USD Index (+6.6%).The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +30.9% versus the AFC Frontier Asia Adjusted Index, which is down −5.6% during the same time period. The fund’s annualized performance since inception is +3.8%, while its 2019 year to date performance stands at −4.0%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.00%, a Sharpe ratio of 0.35 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 was a mixed month for Asian frontier markets as trade tensions continued to negatively impact market sentiment in Vietnam while Bangladesh had another positive month of returns. Furthermore, Kazakhstan and Sri Lanka had a good rebound in their markets and macro concerns continued to have a major impact on sentiment at the Pakistan Stock Exchange. However, at the end of the month there was respite for trade dependent South East Asian economies as President Trump and President Xi Jinping agreed to re-start trade talks at their much-awaited G-20 meeting.
Performance this month was both supported and negatively impacted by individual stocks. In Vietnam, despite the Ho Chi Minh VN Index losing −1.0%, the fund’s Vietnamese holdings did well relative to the market due to good moves in an airport operator (+19.6%), an automotive holding company (+10.1%) and an insurance company (+8.8%). This led to the fund’s Vietnamese holdings returning approximately +1.5% this month compared to a loss for the Ho Chi Minh VN Index.
On the macro front, the economic momentum in Vietnam continues with 2Q19 GDP growth of 6.7% which was in-line with expectations as the manufacturing sector continued being the growth driver at +11.2% YoY. Another big macro positive for Vietnam is the free trade agreement between the country and the European Union which was signed on 30th June 2019 – this agreement should further support major Vietnamese export categories such as garments, footwear, electronics and seafood.
Bangladesh had another positive month and broadly the fund’s Bangladeshi holdings continued to do well but similar to last month, the fund’s biggest position, a pharmaceutical company, impacted performance negatively by approximately 85 basis points. As discussed in last month’s manager comment, the weakness in this company’s stock price has very little to do with fundamentals as its earnings have grown on average by 15.6% over the last four quarters and in the March 2019 quarter, the company’s sales and net profits grew by 26.3% and 22.2% respectively, much ahead of peer growth. The fund holds the London-listed GDR of this company which trades at a 54% discount to the local listing in Dhaka.
This month also witnessed the announcement of the annual Bangladesh budget which is a positive for the manufacturing sector as the government continues to provide tax and duty incentives for the local assembly/manufacturing of consumer appliances, automobiles and mobile phones. This is important as the country looks to reduce the concentration of the garment industry in the manufacturing sector. These tax and duty incentives are already having a positive impact as Samsung has begun assembling mobile phones for the domestic market at its Bangladesh plant since last year while Honda has also recently set up a local motorcycle assembly plant.
This year’s budget increased cigarette prices for the legal tobacco sector once again and we expect this to continue to hurt volumes for the legal tobacco industry which has seen an increasing threat from the illicit cigarette-trade over the past year with the illicit segment accounting for approximately 7% of total cigarette volume from 2% a few years ago. This is still lower than other markets like Sri Lanka and Malaysia where illicit cigarettes account for 14% and 64% of total industry volumes, however, the continued increase in prices is expected to harm volume growth further. As a result, the fund exited its position in British American Tobacco Bangladesh given the move towards an uncertain and unfriendly policy for the tobacco industry in Bangladesh.
The fund’s position in Kazakhstan, Halyk Bank, helped nicely with performance as this stock rallied by +11.7% after the bank guided towards a higher dividend pay-out policy and this is not surprising given the solid capital position of the bank. Its capital adequacy ratio stands at 20.9% with a RoE of 26.8%. At a price to book ratio of 1.2x, valuations continue to be attractive relative to other tier I banks in frontier and emerging markets.
The fund’s position in a Myanmar focused conglomerate, Yoma Strategic Holdings, also added to performance as its stock price ended the month +16.7% as its key segments in food & beverages, financial services and real estate continue to gain traction given the largely untapped consumer opportunity in Myanmar.
A Mongolian junior copper explorer saw its stock rally by +52.9% this month as it announced the start of drilling, however the positive move in this stock was negated by a correction in a Mongolian coal producer as well as a junior copper/gold explorer that the fund holds in Mongolia.
Pakistan also saw the announcement of its annual budget this month and not surprisingly, due to the size of its fiscal deficit, there were both tax increase measures as well as removal/reduction of tax incentives for certain industries as well as for individuals. In addition to this, gas prices have also been raised once again which will most likely deal another blow to disposable incomes and corporate profitability. Due to the increase in gas prices as well as further weakness in the Pakistani Rupee which depreciated by 8.5% this month, inflation is expected to rise further going forward which would continue to be a negative for consumer and stock market sentiment. In light of this, we maintain our underweight position in Pakistan.
The best performing indexes in the AAFF universe in June were Mongolia (+3.9%), Kazakhstan (+1.4%) and Sri Lanka (+1.2%). The poorest performing markets were Pakistan (−5.8%) and Kyrgyzstan (−5.6%). The top-performing portfolio stocks this month were a Mongolian junior copper explorer (+52.9%), a Vietnamese airport operator (+19.6%), a Myanmar focused conglomerate (+16.7%), a Mongolian property company (+15.0%) and a Mongolian hardware store (+12.2%).
In June, we added to existing positions in Mongolia and Vietnam and we partially exited two companies in Bangladesh and Laos and exited a tobacco company in Bangladesh, a bank in Papua New Guinea and a leather producer in Mongolia.
As of 30th June 2019, the portfolio was invested in 81 companies, 2 funds and held 11.3% in cash. The two biggest stock positions were a pump manufacturer from Vietnam (6.6%) and a pharmaceutical company in Bangladesh (6.5%). The countries with the largest asset allocation include Vietnam (27.5%), Mongolia (16.2%), and Bangladesh (14.8%). The sectors with the largest allocations of assets are industrials (21.6%) and consumer goods (21.4%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.92x, the estimated weighted harmonic average P/B ratio was 0.82x and the estimated weighted average portfolio dividend yield was 4.42%.