The AFC Asia Frontier Fund (AAFF) USD A-shares declined −0.1% in March 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−1.4%) and the MSCI Frontier Markets Asia Net Total Return USD Index (−0.2%), but underperformed the MSCI Frontier Markets Net Total Return USD Index (+1.2%) and the MSCI World Net Total Return USD Index (+1.3%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +36.2% versus the AFC Frontier Asia Adjusted Index, which is up +13.7% during the same time period. The fund’s annualized performance since inception is +4.5%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.08%, a Sharpe ratio of 0.43 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.35, all based on monthly observations since inception.
The month began on a positive note across the fund’s larger country weightings as well as in frontier and emerging markets in general but towards the latter part of the month sentiment weakened as investors worried about slowing U.S. economic growth as the U.S. Fed continued to make dovish comments with possibly no rate hikes in 2019. However, economic growth in the fund’s key markets remains robust with Vietnam reporting 1Q19 GDP growth of 6.8% (ahead of expectations) while Bangladesh is expected to post its highest ever GDP growth of 8.1% in the financial year ending June 2019.
Performance was led by Vietnam this month with returns being led by an insurance company, an industrial park developer, a construction company, a cargo handling company and an automotive holding company. This resulted in the fund’s Vietnamese holdings returning +3.7% in USD terms this month, well above the Ho Chi Minh VN Index return of +1.6%.
The fund invested into the largest mall operator in Vietnam to gain further exposure to growing consumer discretionary spending and the penetration of modern retail. We believe this mall operator with the largest retail floor space in the country and with access to its parent company’s anchor tenants provides a good proxy to increasing modern retail penetration in the country which is still significantly below peers such as Thailand and the Philippines.
Vietnam’s macro numbers broadly continue to be robust with manufacturing growth of 12.4% in 1Q19. The manufacturing sector leads the economy due to the country’s attractiveness as a low cost manufacturing hub and this has resulted in foreign direct investments (FDI) increasing by 6.2% YoY in 1Q19 to USD 4.2 bln.
Export growth, after being soft in the first two months of the year, picked up in March with a growth of 5.4% YoY, although this growth is lower than the 14% growth in exports seen in 2018. Slower mobile phone exports which accounted for 21% of total exports this year are the main cause of slower export growth as Samsung, which constitutes a majority of Vietnam’s mobile phone exports, is going through competitive pressures in key markets such as China.
However, other major export segments like textiles, footwear and other electronics have been holding up very well with growth rates of 13%, 15% and 9% respectively so far in 2019. Furthermore, mobile phone exports have been weak now for the past six months but overall export growth has been in line with our expectations of mid-single digit growth. In addition, Vietnam’s exports relative to the region are still growing.
Bangladesh continued to contribute positively to fund performance with this month’s gains being led by a tobacco company (+22.3%) as it declared good quarterly results and a 200% bonus issue (an event that local investors seem to like). So far this year, the fund’s Bangladeshi holdings have returned +7.4% in USD terms while the Dhaka Stock Exchange Broad Index has gained +1.5% in USD terms. This outperformance over the country index is due to investments in strong consumer related franchises which are expected to benefit from growing demand given an outlook of average GDP growth of 7% over the next five years. This economic growth is reflected in the quarterly results of the fund’s Bangladeshi holdings which have grown earnings on average by 14.4% in 4Q18.
Given the outlook for growing demand for consumer goods in Bangladesh it is not surprising that Arcelik, the leading Turkish consumer appliance company, announced its intention to acquire a controlling stake in Singer Bangladesh which has a very strong position in the Bangladeshi consumer appliance industry and whose shares the fund holds. This is Arcelik’s second acquisition in an Asian frontier market after its acquisition of Dawlance Pakistan in 2016 – a sign of the large consumption opportunity in Asian frontier markets.
Not surprisingly, due to rising inflation and the large current account deficit, the State Bank of Pakistan raised benchmark interest rates by 50 basis points taking cumulative rate increases to 475 basis points since January 2018. There are talks of an IMF deal being announced in the coming weeks and though this will strengthen the balance of payments position of the country it may also lead to further fiscal and monetary consolidation measures i.e. tax increases, gas/electricity price increases, reduction in development expenditure and further interest rate hikes and currency weakness. We maintain our underweight position in Pakistan.
The fund’s Kazakh bank holding declared very good results which were ahead of expectations. The fundamentals of this bank remain very sound and it is well placed to take advantage of its size and market share to capture the opportunities that future economic growth in Kazakhstan and the Central Asian region offer.
Mongolia was a detractor to performance in March despite some the fund’s Mongolian consumer holdings declaring excellent results for 2018, notably a bakery company and a cashmere company. The optimism was short lived as political noise around some of the country’s mining operations and an ongoing anti-corruption campaign continued to weigh on the market and investor sentiment.
The best performing indexes in the AAFF universe in March were Kazakhstan (+4.0%), Laos (+2.2%) and Vietnam (+1.6%). The poorest performing markets were Sri Lanka (−4.5%) and Bangladesh (−3.9%). The top-performing portfolio stocks this month were an engineering company from Uzbekistan (+34.8%), a Vietnamese insurance company (+28.8%), a Mongolian coal mine (+27.4%), a Vietnamese brewery (+27.3%) and a Bangladeshi tobacco company (+22.3%).
In March, we added to existing positions in Mongolia, Uzbekistan, and Vietnam and added a Vietnamese retail property company and an Uzbek alcohol producer. We exited a diversified holding company in Vietnam. We partially sold each one company in Bangladesh and Vietnam.
As of 31st March 2019, the portfolio was invested in 86 companies, 2 funds and held 3.9% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.2%) and a pump manufacturer from Vietnam (5.4%). The countries with the largest asset allocation include Vietnam (27.1%), Bangladesh (20.5%), and Mongolia (17.2%). The sectors with the largest allocations of assets are consumer goods (27.9%) and industrials (20.9%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.73x, the estimated weighted average P/B ratio was 2.02x, and the estimated portfolio dividend yield was 4.14%.