The Asia Frontier Fund  USD A-shares declined −1.9% in April 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−3.9%), but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−1.5%), the MSCI Frontier Markets Net Total Return USD Index (+0.2%) and the MSCI World Net Total Return USD Index (+3.5%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +33.6% versus the AFC Frontier Asia Adjusted Index, which is up +9.2% during the same time period. The fund’s annualized performance since inception is +4.2%, while its 2019 performance stands at −2.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.07%, a Sharpe ratio of 0.39 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 month was weak across the large markets in our fund universe and this was more due to country specific issues rather than any broad negative theme in our markets. Bangladesh and Vietnam, in our view, are still amongst the better placed economies across global frontier markets due to their relatively better macro stability, growth of foreign direct investments, rise in exports and very favorable demographics which should see them post GDP growth rates of 6.5-7% over the next five years. The fund’s largest country allocations continue to be Vietnam and Bangladesh with a combined weight of 47%.

Vietnam was weak this month despite a good set of 1Q19 results from most of the fund’s larger holdings. The fund’s airport operator, construction services company, commodity transportation company, air cargo handling company, automotive holding company and mall operator all declared earnings growth between 13%-23%. Concerns over regional export growth given worries regarding global GDP growth was a reason for market weakness in Vietnam this month due to its dependence on trade. However, as written in our recent travel report, Vietnam continues to show positive export growth while peers are showing flat to negative export growth so far in 2019.

Exports in April picked up momentum with YoY growth of 8%, better than the 1Q19 export growth of 4.7%, and this was primarily due to the mobile phone segment growing by 12% after having two quarters of weak numbers. Tourist arrivals also witnessed a recovery in April with a YoY increase of 9.5%, better than the 7% growth reported in 1Q19 with arrivals continuing to be led by Asia which saw an increase of 11.5% this month.

In Bangladesh, the fund’s largest position is a pharmaceutical company that declared excellent results which were significantly ahead of its peers as net profits in 1Q19 grew by 23%. However, the Dhaka Stock Exchange Broad Index (DSE Broad Index) remained under pressure due to worries about non-performing loans (NPLs) in the banking industry. This is a valid concern but most of the sector’s NPLs are concentrated in weak state-run banks while many private sector banks have well managed risk and effective management teams and this is also reflected in valuations with the fund’s bank holding trading at a premium to both private and state-run peers due to better governance.

Local investors in Bangladesh seem to panic on any negative news flow while the overall macro environment remains relatively stable with exports growing by 11.6% in the current financial year which is significantly higher than most Asian peers while foreign exchange reserves at USD 32 bln cover 7 months of imports. Furthermore, the country’s debt to GDP at 35% is also amongst the lowest in the region. The fund’s Bangladeshi holdings have returned +6.7% this year while the DSE Broad Index is -4.0%. This divergence in performance is due to positive moves in a pharmaceutical and tobacco company.

The KSE100 Index in Pakistan remained under pressure this month, however the much-needed loan agreement with the IMF was finalised on 12th May. The IMF will provide Pakistan with a three year USD 6 bln loan and this agreement with the IMF could also lead to loans of USD 2-3 bln from other multilateral agencies like the Asian Development Bank and World Bank. These loans will help stabilise Pakistan’s external position significantly, however they would also bring with it further measures to stabilise the economy such as higher interest rates, increase in power tariffs and additional Rupee devaluation. Though valuations have become attractive the above measures will continue to impact earnings for most sectors over the next few quarters. Hence the fund’s exposure to Pakistan remains at a low of 4.2%.

Sri Lanka had to contend with the tragic Easter Sunday attacks in its capital Colombo and Batticaloa (East coast of Sri Lanka) which will have a near term negative impact on its tourism industry and this will possibly also impact the overall economy as well since the tourism industry accounts for 5% of GDP and is also the third biggest foreign exchange earner. Though the tourism sector can recover from these incidents as have other tourist destinations which have experienced similar attacks (Bali/Egypt), the near-term impact on GDP growth and foreign exchange reserves/balance of payments will be negative. The fund has an exposure of less than 3.5% to Sri Lanka and though valuations are very attractive, overall policy uncertainty could persist till the country conducts presidential and parliamentary elections at the end of 2019 and early 2020 respectively.

The fund’s exposure to Uzbekistan and Iraq helped with performance this month as the AFC Uzbekistan Fund and the AFC Iraq Fund, through which the AFC Asia Frontier Fund invests in these markets, were up +4.5% and +3.7% respectively.

The best performing indexes in the AAFF universe in April were Iraq (+2.5%) and Vietnam(-0.1%). The poorest performing markets were Bangladesh (−5.3%) and Kazakhstan (−5.2%). The top-performing portfolio stocks this month were a junior oil & gas producer from Papua New Guinea, (+29.5%), a Mongolian steel producer (+25.0%), a Mongolian footwear manufacturer (+13.3%), a Bangladeshi pharmaceutical company (+12.4%) and a Mongolian industrial company (+9.8%).

In April, we added to existing positions in Mongolia and Vietnam and partially sold one company in Mongolia.
As of 30th April 2019, the portfolio was invested in 86 companies, 2 funds and held 4.1% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.3%) and a pump manufacturer from Vietnam (6.1%). The countries with the largest asset allocation include Vietnam (27.0%), Bangladesh (20.4%), and Mongolia (16.8%). The sectors with the largest allocations of assets are consumer goods (26.4%) and industrials (21.0%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.59x, the estimated weighted average P/B ratio was 1.87x, and the estimated portfolio dividend yield was 4.56%.