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Asia Frontier Fund USD A-shares were flat in July 2017. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (−0.6%) but underperformed the MSCI Frontier Markets Net Total Return USD Index (+2.1%) and the MSCI World Net Total Return USD Index, which was up +2.4%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +77.6% versus the MSCI Frontier Markets Asia Net Total Return USD Index, which is up +47.2%, and the MSCI Frontier Markets Net Total Return USD Index (+43.8%) during the same time period. The fund’s annualized performance since inception is +11.4% p.a., while its YTD performance stands at +4.2%. The broad diversification of the fund’s portfolio has resulted in lower risk, with an annualized volatility of 8.85%, a Sharpe ratio of 1.26, 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.

The political uncertainty in Pakistan continued to hang over the market for the most part in July.  Fortunately, a large part of this political uncertainty was put to rest on 28th July when the Prime Minister, Nawaz Sharif, was disqualified by the Supreme Court from holding public office. So far, the market has taken this in its stride, with the KSE 100 remaining flat since 28th July as over the past few weeks it became more apparent that the Prime Minister would be disqualified and this was therefore being priced in when the decision by the Supreme Court came in.

More importantly, the current government led by the Pakistan Muslim League (N) or the PML (N) will continue to run affairs until the caretaker government comes in before the national elections in June 2018. Also important to note, the Prime Minister’s position will most probably be held in the interim by Shehbaz Sharif, the Chief Minister of the Punjab province and the younger brother of Nawaz Sharif. Additionally, these events went off without either any major disruption to business activities or any kind of large scale protests which should be seen as a positive.

Politically, one could argue that the Supreme Court judgment is a blow for the PML (N). The main opposition, the Pakistan Tehreek-e-Insaf (PTI), is led by Imran Khan (a former cricket player who became a national hero after leading the Pakistan national team to victory at the 1992 Cricket World Cup, Pakistan’s first and only win at that competition). The PTI could look to gain on this in the next elections, but it is important to note that Punjab province accounts for the majority of the seats in the National Assembly and the PML (N) has historically had a very strong position in Punjab with a large amount of development work being executed over the past few years. Having said that, the next elections will be more hard fought than previously assumed. Economically, the China Pakistan Economic Corridor (CPEC) is not expected to be impacted by the political change given its strategic importance both economically and geopolitically. This is important as the CPEC is expected to add significant electric power capacity which should aid economic growth in the future.

In our “2017 Outlook” published in January, we had expected some amount of political noise, as well as currency depreciation, and given the ongoing political uncertainties, as well as the correction of the KSE100 Index by 12% since its peak in May 2017, valuations do not appear to be stretched, with the KSE100 Index trading at a trailing 12-month P/E of 9.0x, a discount to most frontier and emerging markets in the region.

The best-performing markets for the fund this month were Bangladesh and Mongolia. In Bangladesh, performance was led by the fund’s largest stock holding, a pharmaceutical company whose GDR was up 9.1% and is still trading at a huge discount to its local listing. Other positive contributions in Bangladesh came from a shoe retailer, a tobacco company, and a telecom company, all of which have shown very good results for the June quarter. We continue to be positive on Bangladesh which we will write about in next month’s travel report. In Mongolia, performance was led by the fund’s junior mining holdings and a consumer beverage company which will see a merger between its and Heineken’s Mongolian beer and vodka businesses.

Besides Pakistan, performance was dragged down by Vietnam and Sri Lanka. Within Vietnam, the fund’s construction and industrial related companies saw a correction after most of them had a good run in the first half of 2017. The Sri Lankan market also corrected as it has also had a good performance in the first half of this year. There was no major negative economic or company specific news and hence this correction would not worry us unduly.

The best performing indexes in the AAFF universe in July were Mongolia (+8.2%), Bangladesh (+3.6%), and Cambodia (+1.3%). The poorest performing markets were Iraq (-4.4%) and Sri Lanka (-1.6%). The top-performing portfolio stocks this month were all from Mongolia: a coal mine (+54.5%), a gold mine (+34%), a brewery (+33.4%), and a junior copper/gold mine (+33.3%).

In July, we added to existing positions in Mongolia, Pakistan, Sri Lanka, and Vietnam. We did not sell or reduce any of our existing positions.

As of 31st July 2017, the portfolio was invested in 120 companies, 1 fund, and held 3.4% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (8.4%) and an investment company in Myanmar (3.1%). The countries with the largest asset allocation include Vietnam (27.0%), Pakistan (22.7%), and Bangladesh (17.3%). The sectors with the largest allocations of assets are consumer goods (29.9%) and healthcare (15.2%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 15.65x, the estimated weighted average P/B ratio was 2.80x, and the estimated portfolio dividend yield was 3.86%.

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