Portfolio Review
The fund’s return also saw a marked improvement from the bottom of March 2020 and has gained 31.3% in the past nine months, and has a positive return of approximately +5.1% for 2020. Returns in 2020 and especially since March 2020 have been broad-based and led by Bangladesh, Sri Lanka, Uzbekistan, Pakistan, Vietnam, Mongolia, and Kazakhstan.
In Bangladesh, returns were driven by a pharmaceutical company whose stock price is up by more than 100% this year as it has reported earnings growth much better than peers. Its valuation is still at a discount to other Bangladeshi pharmaceutical companies, and it will be the key distributor of the AstraZeneca-Oxford University developed vaccine in Bangladesh through its partnership with the Serum Institute of India. This company is the fund’s largest Bangladeshi holding.
The fund’s Sri Lankan holdings have returned +15.3% in USD terms in 2020 which is significantly ahead of the Colombo All Share Index return of +5.0%. Attractive valuations, political stability, economic reopening and lower interest rates drove returns which were led by four companies, namely, a latex glove manufacturer, two consumer and healthcare conglomerates, and a leisure company. The fund’s investment in the AFC Uzbekistan Fund has also helped performance in 2020 with the AFC Uzbekistan Fund up by +19% in 2020 as very attractive valuations continue to drive local and foreign investors into the stock market.
In Pakistan, the fund’s holdings have increased by +25.2% in USD terms which again is significantly ahead of the KSE100 Index’s +2.5% USD return in 2020. A 625 basis point cut in the State Bank of Pakistan’s benchmark interest rate in 2020 positioned the fund well as it had high exposure to cyclical names in the auto and cement sectors, both of which saw powerful rallies. These are the two sectors we have been most bullish on since the fourth quarter of 2019.
A robust economic recovery due to a very well managed pandemic response led cyclical stocks to drive returns in Vietnam too. A transportation company and a construction contractor are up by almost 100% since the end of March 2020, while an auto holding company, a mall operator, and an industrial park developer the fund holds have seen an increase of 82%, 58% and 48% in their respective stock prices since the end of March 2020.
Mongolian returns this year were driven by resource companies. A coking coal producer has seen an increase of almost 100% in its stock price this year as China restricts Australian coking coal imports and most of the fund’s copper and gold explorers have rallied by more than 100% this year on the back of an increase in copper and gold prices. The fund has two positions in Kazakhstan, a bank and an uranium producer, both of which contributed positively to returns in 2020.
The key purchases made by the fund in 2020 were in Sri Lanka as the fund increased its weight to the country as valuations are extremely attractive, earnings are expected to grow from a low base, and there is much needed political stability. The fund purchased a consumer and healthcare conglomerate whose businesses are seeing a turnaround from the twin impacts of the 2019 Easter Sunday attacks and the pandemic. This stock is up more than 50% since the purchase in July 2020.
At the end of November 2020, the fund also purchased a Sri Lankan-listed resort operator which generates most of its revenue from its Maldivian resorts but also manages resorts in Sri Lanka. We believe the Maldives and Sri Lanka could see an increase in long-stay European travellers once the vaccination process gets underway, which will be positive for the resort company’s occupancy levels. The stock price has increased by 25% since the fund’s purchase.
Another tourism-related company the fund purchased is a casino operator in Cambodia which will be the only major Asian casino operator to report net profits in 2020 despite the impact of the pandemic on international travel. Phnom Penh continues to have a large expat community which frequents this company’s gaming facilities and any incremental increase in international tourist arrivals can provide further impetus to the company’s profitability.
In Pakistan, the fund invested in the Pakistani subsidiary of a global consumer healthcare company which is the leading player in key growing OTC (over the counter) categories like cold and flu, health supplements and oral care. The company’s brands are very well respected amongst consumers, and its key product segment volumes are growing by 12-15%, which is ahead of overall industry growth.
The fund also purchased one of the leading consumer appliance companies in Pakistan as a recovery in consumer spending and lower interest rates drives demand for home appliances, a segment which has a lot of growth potential in Pakistan as disposable incomes and urbanisation increase in Pakistan.
In Vietnam, the fund purchased the country’s leading beer producer as the brewery is witnessing a post-pandemic recovery in its volumes and is also getting more aggressive in launching new products. Its profit margins continue to show a significant improvement as the new management team controls the cost structure rigidly. The stock price has gained 80% since its bottom in March 2020.
The fund also invested in the London-listed GDR of the leading uranium producer globally which has its operations in Kazakhstan. With a structural deficit in primary global uranium production, compounded by a shift towards renewable energy in Western economies, we believe this company can benefit from increased demand for its product while it is also well positioned to benefit from an expected rebound in pricing as uranium prices must rise from the current USD 30 per pound to the USD 60 to USD 70 range in order to incentivize new global production to alleviate the ongoing deficit.
On the sell-side, the fund exited a Bangladeshi consumer food company and Pakistani cement producer during the year, taking profits on both. In Sri Lanka, the fund realised a gain of 156% within four months by exiting its holding in a latex glove manufacturer since we believe that future news flow about vaccines and vaccinations would most likely cap any significant upside in the stock price from here.
In Vietnam, the fund sold its holding in an industrial park developer as we believe its business model was shifting too much towards regions of Vietnam which are not the main recipients of manufacturing-related foreign direct investments. The fund also exited a Vietnamese construction company after its stock price rallied very quickly by 50% from its bottom in March 2020, while also disposing of the investment in an airport operator in April 2020 due to the prolonged negative impact of the pandemic on its business model. Though we have entered some travel and tourism companies in the latter part of 2020, this airport operator still trades at rich multiples, even under an assumption of normalised earnings. The fund further disposed a Mongolian duty-free shop operator in April 2020.
As a result of selective buying and selling, the fund’s turnover also remained low and we continue to follow our long-term approach of remaining invested in companies we like. The stocks which drove returns since the bottom of March 2020 were led by some new positions but predominantly by companies the fund has held since before the pandemic struck.
Overall, compared to initial fears, Asian frontier markets have done much better than expected in terms of both economic performance and stock market performance which has resulted in a fund return of +5.1% for 2020.
Portfolio fundamentals remain stable in a volatile environment
|
P/E
|
P/B
|
Dividend
Yield
|
Return on Equity
|
Debt/
Equity ratio
|
3 Year Earnings CAGR
|
|
7.5
|
0.8
|
4.1%
|
14.6%
|
0.5
|
11.6%
|
(Source: Bloomberg, as of 30th November 2020)
| 
