The  Asia Frontier Fund  USD A-shares declined −0.1% in July 2019 with a NAV of 1,307.85. The fund outperformed the AFC Frontier Asia Adjusted Index (−1.4%) but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+2.9%), the MSCI Frontier Markets Net Total Return USD Index (+2.5%) and the MSCI World Net Total Return USD Index (+0.5%).The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +30.8% versus the AFC Frontier Asia Adjusted Index, which is down −6.9% during the same time period. The fund’s annualized performance since inception is +3.7%, while its 2019 performance stands at −4.1%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.95%, a Sharpe ratio of 0.34 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 was another mixed month for Asian frontier markets with Sri Lanka and Vietnam seeing positive moves while the rest of the fund’s universe ended the month in negative territory. Macro concerns in Pakistan kept the market in Karachi weak while domestic selling pressure kept the Dhaka Stock Exchange under pressure despite favourable macro indicators such as increasing exports and remittances, a declining current account deficit and extremely strong GDP growth of 8.0%.
This month’s performance was led by Sri Lanka as the Colombo All Share Index saw a broad-based rally of +10.5% on the back of softer benchmark interest rates, low valuations and improving macro indicators (higher foreign exchange reserves and a contracting trade deficit). The fund’s telecom and two consumer-related holdings saw their share prices increase by +23.3%, +15.5%, and +9.8% respectively and P/E multiples for all three of these companies continue to be less than 10x reflecting the value in the market.
The fund’s Vietnamese holdings also had a good month as most of the companies that the fund holds have declared strong earnings growth for the second quarter with a median earnings growth of +18.4% YoY. One of the companies’ results which stands out is that of industrial park developer Kinh Bac City Development (KBC), which saw its 2Q19 revenue increase by 204% while net profits grew by 397% on the back of higher land sales at its industrial parks. We have been invested in this name for a few years due to the trend of rising foreign direct investment into Vietnam and the current trade tensions appear to be playing out well for the company as is reflected in rising land sales to companies looking to relocate from China or looking at manufacturing locations other than China. This demand for industrial land is also leading to higher prices with price per square meter at one of KBC’s industrial parks increasing by 40% YoY in the first half of 2019. The stock is up +23.0% year to date.
The fund’s Vietnamese airport operator, Airports Corporation of Vietnam (ACV), also declared good 2Q19 results and more importantly the company is seeing traction in its non-aeronautical business as South Korea based Lotte Duty Free opened its duty free store at Noi Bai International Airport in Hanoi which should incrementally help ACV increase its higher margin non-aeronautical revenues which at 20% of overall revenues is significantly lower than regional peers.
Though tourist arrivals into Vietnam have been slower than last year, ACV is still seeing higher passenger throughput relative to both regional and global peers as connectivity to Vietnam improves due to the growth of low-cost carriers. Furthermore, as the chart below shows, well established airport operators have generated a median cumulative total return of 15.8% over the past decade and ACV is well positioned to generate long term returns due to increasing capacity, a greater proportion of international passengers, and higher non-aeronautical revenues, the latter two of which have higher margins.