The Asia Frontier Fund lost −0.04% in February 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−0.5%) but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+7.4%), the MSCI Frontier Markets Net Total Return USD Index (+0.8%) and the MSCI World Net Total Return USD Index (+3.0%). The performance of the AFC Asia Frontier Fund A-shares since inception on 30th March 2012 now stands at +36.4% versus the AFC Frontier Asia Adjusted Index, which is up +15.3% during the same time period. The fund’s annualized performance since inception is +4.6% p.a. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualized volatility of 9.13%, a Sharpe ratio of 0.44 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.36, all based on monthly observations since inception.

Global equities continued to witness bullish sentiment in anticipation of a positive outcome between China and the U.S. with respect to trade negotiations. With President Trump extending the 1st March 2019 tariff deadline, optimism across global equity markets continued to build.

Vietnam was no exception to this optimism given its dependence on trade. As a result, the Ho Chi Minh VN Index rallied by +6.0%. However, a majority of this rally was led by a few stocks, namely, Vingroup, Vinhomes and Vincom Retail. Nevertheless, despite the fund not owning these stocks due to their valuations, the fund’s holdings in Vietnam continued to do well for another month as returns were led by a consumer staples company, a construction services company, an industrial park developer and an airport operator, all of whom have been showing good quarterly results over the last few quarters and are well tied into the strong consumption and industrial growth of the country.

The much-anticipated summit between U.S. President Donald Trump and North Korean leader Kim Jong-un took place in Hanoi but ended with a whimper. However, Vietnamese companies used the summit as an opportunity to sign new deals worth USD 21 bln with U.S. companies — Boeing and General Electric — for supply of airplanes and jet engines to Vietjet and newcomer Bamboo Airways. This should reduce some of the worries over the trade deficit that the U.S. has with Vietnam given the current U.S. administration’s focus towards trade deficits. Furthermore, the attention Vietnam received from hosting the summit can have a positive impact on the tourism sector, an industry and theme we are very positive on over the next three to five years.

After rallying by 8.1% in January, the Bangladesh stock market took a breather as most banking stocks corrected. However, the fund’s holdings outperformed the Dhaka Stock Exchange Broad Index due to positive moves in the fund’s consumer focused holdings, namely a tobacco company, a pharmaceutical company and a bank. On the macro front, garment exports continue to do well, with growth picking up over the past few quarters with this financial year so far seeing a year over year growth of 14.5%, a much faster pace compared to the previous two financial years.

Military tensions between India and Pakistan kept the Pakistani market weak this month due to the recent skirmishes in Kashmir. The fund has been underweight Pakistan for the last few quarters due to the economic uncertainties and with relations with India expected to remain tense, besides hurting market sentiment it could also distract the government from turning around the economy.

Despite the Mongolian market being weak this month, the fund’s Mongolian holdings significantly outperformed the MSE Top 20 Index due to positive moves in three of the junior mining companies the fund holds in the coking coal and copper/gold segment.

Uzbekistan saw the Agency for State Asset Management, which was established in January, take responsibility during the month for managing the privatization of the government’s (largely majority) interests in several dozen companies ranging from banks to consumer goods, construction materials, insurance and manufacturing. Most of these companies are already listed, so over the coming years, as these stakes are privatized, we expect to see a marked improvement in the quality of management and supervisory boards as well as liquidity and operational performance as members of the state are replaced by private sector executives.
In-line with the close to 4% rally in the Kazakhstan Stock Index this month, the fund’s only holding in the country, a bank, witnessed a rally of +12.9%. Overall, despite a good run for the fund’s holdings in Vietnam, Bangladesh, Mongolia, and Kazakhstan, performance was hurt by the correction in the Iraqi stock market, which impacted the fund’s performance by close to 50 basis points.

The best performing indexes in the AAFF universe in February were Vietnam (+6.0%), Kyrgyzstan (+4.2%), and Kazakhstan (+3.8%). The poorest performing markets were Iraq (−9.7%) and Pakistan (−4.3%). The top-performing portfolio stocks this month were a drug store operator from Uzbekistan (+112.5%), a junior copper/gold miner from Mongolia (+40.0%), a Mongolian cashmere producer (+25.8%), a Mongolian hotel operator (+21.0%), and a Vietnamese consumer conglomerate (+14.4%).

In February, we added to existing positions in Mongolia, Uzbekistan, and Vietnam and added a Pakistani bank and two new companies in Uzbekistan: a cable producer and a municipal architecture EPC. We exited one oil/gas distributer in Pakistan, a food producer, and a steel company in Vietnam. We partially sold 3 Mongolian companies and a company in Laos.

As of 28th February 2019, the portfolio was invested in 108 companies, 1 fund and held 5.7% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.6%) and a pump manufacturer from Vietnam (5.2%). The countries with the largest asset allocation include Vietnam (25.7%), Bangladesh (20.1%), and Mongolia (18.0%). The sectors with the largest allocations of assets are consumer goods (29.7%) and industrials (22.0%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.30x, the estimated weighted average P/B ratio was 1.91x, and the estimated portfolio dividend yield was 4.16%.

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