The Asia Frontier Fund (AAFF) USD A-shares declined -1.5% in November 2018. The fund outperformed the AFC Frontier Asia Adjusted Index (-2.6%) but underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+2.9%), the MSCI Frontier Markets Net Total Return USD Index (+2.2%) and the MSCI World Net Total Return USD Index (+1.1%). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +37.5% versus the AFC Frontier Asia Adjusted Index, which is up +15.9% during the same time period. The fund’s annualized performance since inception is +4.9% p.a., while its YTD performance stands at -19.5%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.29%, a Sharpe ratio of 0.47 and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.37, all based on monthly observations since inception.

Overall market sentiment improved slightly this month as oil prices have corrected by more than 30% from the highs seen in the first week of October while the U.S. Fed Chairman’s surprise comments about going slow on further FED-interest rate hikes were also a positive for investor sentiment. Valuations for our universe continue to remain attractive and with long term economic growth not being the issue in our markets, we expect that many of the factors holding back the markets in our universe will be resolved in 2019, i.e. elections in Bangladesh due on 30th December 2018, a possible IMF loan to Pakistan in 1Q19, greater political clarity in Sri Lanka and implications of the US-China trade war on Vietnam (with net impact expected to be positive).

The fund had a positive performance until the last eight trading days of the month during which time overall performance was impacted due to two individual holdings (interestingly both listed in London), a Myanmar focused investment holding company and a Mongolian junior oil & gas company, with each costing performance by 65 basis points and 34 basis points respectively. The move in the Myanmar holding company appears to look like a “one off” due to poor stock liquidity on the AIM market in London, as our two other major positions in Myanmar did very well this month. Further, on the last trading day of the month, the Pakistani Rupee (PKR) depreciated by 3.3% which had a 25 basis points negative impact despite the fund having the lowest exposure to Pakistan since inception. Therefore, a relatively good month was unfortunately negated by a few individual factors towards the end of the month.

The fund had a positive performance in Bangladesh despite the market there being soft in the run up to national elections as the fund’s healthcare holdings did well with both the pharmaceutical companies that the fund holds trading at attractive valuations and below their five-year average P/E ratios. We are positive on Bangladesh going into 2019 and expect a lot of the overhang on sentiment to improve post elections which will be held on 30th December 2018.

Vietnam also contributed positively to performance this month with good moves for the fund’s construction and infrastructure companies, all of which are priced extremely cheaply with trailing twelve-month P/E’s of <10x while order books remain stable on the back of strong industrial production and GDP growth. The fund’s Vietnamese automotive holding company continues to have a good run on the back of strong 3rd quarter numbers for Honda Vietnam while valuations remain very attractive at a trailing twelve-month P/E of 10.1x and dividend yield of 7.3%. The government this month also ratified the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), which is a similar trade deal to the erstwhile TPP but without participation of the U.S. Such trade deals integrate Vietnam further into global trade and supply chains and are another long-term positive for the Vietnamese manufacturing sector.

Two of the fund’s Myanmar focused holdings, a conglomerate and a junior miner, delivered returns of 47% and 26% respectively this month. Both of these companies’ stock prices have been hurt less due to fundamentals and more due to the negative press surrounding the country in the previous months. The conglomerate declared good quarterly results due to an improvement in its real estate division while its consumer and financial services arms continue to do well. The junior mining company also made a positive announcement with respect to further developments at its polymetallic mine.
In Pakistan, the Central Bank raised benchmark interest rates by 150 basis points, which was more than expected most likely due to higher inflation expectations in 2019 while the PKR depreciated by 3.3% on the last day of the month. The PKR weakness did not come as a surprise to us as we were expecting further currency depreciation in the run up to a possible IMF loan in 1Q19 which would be a good time to reassess our current weight in Pakistan, which is the lowest since the inception of the fund.

The political situation in Sri Lanka continues to remain fluid as the Supreme Court ordered Parliament to reconvene and put on hold the call for early elections, and we expect some sort of political clarity to emerge in the next few weeks. The fund’s weight in Sri Lanka is less than 4% (also the lowest since the inception of the fund) so the current issues do not have a major impact on the fund’s performance. However, company specific valuations are looking very attractive now in the banking sector where the top three private sector banks by assets are trading at a price/book ratio of less than 1.0x. Uzbekistan continued its reforms during the month with the most notable ones being the establishment of a position within the Ministry of Foreign Trade with the sole focus of leading the negotiations and ascension of Uzbekistan into the World Trade Organization and the government’s plan to liberalize the aviation industry, while turning the state-owned Uzbekistan Airways into a regional competitor. A local stock broker has also kicked off the roadshow for an industrial products manufacturer where the government is conducting a partial sell down of its stake, in line with the government mandate for the state to divest all non-core investments in the country. As part of this sell down the government intends to provide the proceeds from its share sale to the company in the form of a soft loan as the company currently operates at 100% capacity and needs to expand its production facilities. This should add greater liquidity to the company’s shares, as well as attract new investors, local and foreign, into the stock market and thus help to increase the depth of the market.
The best performing indexes in the AAFF universe in November were Cambodia (+9.2%), Kazakhstan (+2.0%), and Vietnam (+1.3%). The poorest performing markets were Mongolia (-6.0%) and Pakistan (-2.8%). The top-performing portfolio stocks this month were: a cement company from Uzbekistan (+52.4%), a Myanmar focused conglomerate (+47.1%), a junior mining company based in Myanmar (+26.0%), a Mongolian tour operator (+23.0%), and another cement company from Uzbekistan (+20%).

In November, we added to existing positions in Kyrgyzstan, Mongolia, Papua New Guinea, Uzbekistan and Vietnam. We partially exited one port operator in Cambodia and from three companies in Mongolia, while completely exiting from a Mongolian financial holding company and an oil engineering company from Uzbekistan.

As of 30th November 2018, the portfolio was invested in 113 companies, 1 fund and held 2.9% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.3%) and a pump manufacturer from Vietnam (5.0%). The countries with the largest asset allocation include Vietnam (25.9%), Bangladesh (20.2%), and Mongolia (18.6%). The sectors with the largest allocations of assets are consumer goods (29.1%) and industrials (21.1%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.05x, the estimated weighted average P/B ratio was 2.02x, and the estimated portfolio dividend yield was 3.73%.

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