The Asia Frontier Fund declined −1.5% in May 2019. The fund outperformed the AFC Frontier Asia Adjusted Index (−4.7%), the MSCI Frontier Markets Asia Net Total Return USD Index (−2.1%) and the MSCI World Net Total Return USD Index (−5.8%) but underperformed the MSCI Frontier Markets Net Total Return USD Index (+2.2%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +31.5% versus the AFC Frontier Asia Adjusted Index, which is up +4.1% during the same time period. The fund’s annualized performance since inception is +3.9%, while its 2019 performance stands at −3.6%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.04%, a Sharpe ratio of 0.36 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.34, all based on monthly observations since inception.

This month was all about the continued trade tensions. Ongoing negotiations for a possible trade agreement between China and U.S. broke down and the U.S. went ahead and increased duties from 10% to 25% on USD 200 bln of Chinese exports to the U.S. In addition to this, President Trump threatened tariffs on Mexican imports to the tune of 5% and this tariff rate could increase to 25% going forward, but for the time being tariffs have been suspended indefinitely as the US and Mexico have come to an agreement on trade and illegal immigration.

In light of these events, global markets remained volatile, however certain Asian frontier markets like Bangladesh (+3.4%), Iraq (+14.5%) and Laos (+4.0) performed well and this helped balance the relative performance of the fund as both the MSCI Emerging Markets Index and the MSCI World Index declined significantly by -7.3% and -5.8% respectively. In the long run, the fund as well as Asian frontier markets have displayed very low correlations with both emerging and developed markets, which is a reflection of the diversification strategy of the fund and also displays how certain markets in our universe are more driven by domestic factors rather than global.

Vietnam had a weak month as continued worries over global trade impacted market sentiment. However, as discussed in last month’s manager comment, the country continues to be one of the few Asian exporters which is displaying export growth while peer countries struggle. This could be a reflection of the shift of manufacturing from higher cost locations into Vietnam and foreign direct investment (FDI) numbers also support this trend as so far in 2019, FDI into Vietnam has grown by 7.5% YoY to USD 7.3 billion. Tourist arrivals also continue to pick up after a soft first quarter, with May 2019 seeing 14.3% YoY growth and what is most comforting in these numbers is the 13.4% growth in Chinese arrivals, a key tourist market which accounts for close to 30% of tourist arrivals. We believe that the Vietnamese tourism industry is on a long term structural growth path due to better connectivity between the country and key source markets in Asia. The fund owns Airport Corporation of Vietnam (ACV) in order to gain exposure to this positive long term trend.

Despite the Vietnamese market being soft this month, the fund’s larger holdings did relatively well due to good stock price performance by an industrial and agricultural pump company, an industrial park developer and an automobile holding company. Performance in Vietnam was negated by two construction related companies and an insurance company and this resulted in the fund’s Vietnamese holdings showing an overall flat performance despite the Ho Chi Minh VN Index being down -2.0% this month.

The DSE Broad Index in Bangladesh saw a recovery this month and this led to positive performance for most of the fund’s Bangladeshi holdings. However, on the second and third last trading day of the month, the fund’s largest position came under selling pressure for no apparent reason and this impacted fund performance by close to 1.5%. This company is one of the leading pharmaceutical companies in Bangladesh with the third highest domestic market share and over the last four quarters its earnings have grown on average by 15.6% and in the March ending quarter its sales and net profit growth of 26.3% and 22.2% significantly outperformed peers. The fund holds the GDR of this company which trades at a 41% discount to the local listing in Dhaka. Therefore, the selloff in this stock had not much to do with fundamentals.

Though the fund has a low weight to Sri Lanka two of our positions did well despite the market in Colombo being weak. The fund’s telecom and consumer goods holding both declared good results for the quarter which was aided by an improvement in margins. This resulted in their stock prices rallying by +6.9% and +8.9% respectively despite the Colombo All Share Index weakening by -3.1% this month. Valuations in Sri Lanka are looking very attractive now with most blue-chip companies trading at multi-year low multiples. Our on the ground visit to Colombo in June should give us a better picture of the outlook going ahead.

Our underweight position in Pakistan continues to pay off as the KSE100 Index remains weak. The 150 basis points increase in benchmark interest rates and the 3.8% weakening of the Pakistani Rupee were both actions that the authorities took in order to finalize a USD 6 billion loan agreement with the IMF. Though valuations are looking more attractive the outlook for earnings growth continues to remain depressed as the economy slows down to a GDP growth of less than 3%.

Mongolian equities have been weak over the past few months even though the underlying economy continues to improve. First quarter 2019 GDP grew 8.6% on the back of strong and rising coal exports, as well as continued copper and gold exports from Rio Tinto’s Oyu Tolgoi mine. April exports of coal were widely publicized as being 3.7 mln tons, a 3% increase year over year, while China increased its purchase of Mongolian coal by 12.9% month on month. Last month Fitch Solutions published a price forecast for 2019 coking coal of USD 195/ton due to production shortfalls in Australia and increased demand from India, both of which are net positives for Mongolia. Furthermore, as President Battulga increasingly expresses his desire to be at “peace with China”, the coming months are likely to see more cooperation between the two countries, especially in relation to logistics projects related to China’s Belt and Road Initiative.

The best performing indexes in the AAFF universe in May were Iraq (+14.5%), Kyrgyzstan (+10.0%) and Laos (+4.0%). The poorest performing markets were Kazakhstan (−3.3%) and Sri Lanka (−3.1%). The top-performing portfolio stocks this month were a Mongolian material company (+17.3%), a Laotian bank (+10.7%), a Pakistani automotive battery company (+9.8%), a Sri Lankan consumer goods company (+8.9%) and a Mongolian junior gold/copper producer (+8.7%).

In May, we added to existing positions in Mongolia, and Vietnam and we exited a beverage company in Vietnam and a motorcycle company in Pakistan.

As of 31st May 2019, the portfolio was invested in 83 companies, 2 funds and held 6.8% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.0%) and a pump manufacturer from Vietnam (6.3%). The countries with the largest asset allocation include Vietnam (26.3%), Bangladesh (19.4%), and Mongolia (15.8%). The sectors with the largest allocations of assets are consumer goods (24.7%) and industrials (21.0%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.73x, the estimated weighted average P/B ratio was 2.02x, and the estimated portfolio dividend yield was 4.64%.