Asia Frontier Fund USD A-shares gained +0.7% in September 2017. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+3.8%), the MSCI Frontier Markets Net Total Return USD Index (+2.0%), and the MSCI World Net Total Return USD Index, which gained +2.2%. The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +72.6% versus the MSCI Frontier Markets Asia Net Total Return USD Index, which is up +55.7%, and the MSCI Frontier Markets Net Total Return USD Index (+52.2%) during the same time period. The fund’s annualized performance since inception is +10.4% p.a., while its YTD performance stands at +1.3%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 8.91%, a Sharpe ratio of 1.15, 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 fund got back into positive territory this month as the Pakistani market stabilized after the volatility it had faced over the past few months. The KSE100 Index gained 2.9% this month and most of the fund’s holdings in Pakistan closed in the green, led by a consumer finance company which gained +19%. During the month, an election was held for the National Assembly seat which was vacated by former Prime Minister Nawaz Sharif which resulted in his wife competing for the seat in this constituency. Though the ruling PML (N) led by the Sharif family regained this constituency, the win was not as comprehensive as the one in 2013, so it would be too early to judge in whose favour next year’s national elections will swing, although the PML (N) still has a very strong voter base in Punjab which accounts for the majority of the seats in the National Assembly.

Though macro concerns continue to remain given the wide current account deficit and worries over possible currency depreciation, economic indicators are positive, with auto sales and private sector credit continuing to show double digit growth. Further, industrial production grew at 13% YoY in July 2017, with the growth being broad-based across industries, which is also a positive sign. Though the Pakistani rupee depreciation can hurt consumer discretionary companies in the auto and consumer appliance industries in the short run, the longer-term demand drivers continue to be in place, i.e. improved power supply, improved security, urbanisation, and rising disposable incomes. Further, valuations for such companies in the consumer discretionary sector continue to be attractive.

Vietnam contributed positively to fund performance as well with most of the fund’s Vietnamese holdings ending positive this month. A consumer conglomerate has done well for us over the past few months as it was undervalued after posting disappointing first half numbers and it also announced a share buyback during the month, which led to positive sentiments for this stock. Economic data out of Vietnam remains robust with 3Q17 GDP growth at 7.5% led mainly by the manufacturing and services sectors, which have grown by 12.8% and 7.3% respectively to date. Foreign Direct Investments (FDI) have also grown by 13% YoY this year to USD 12.5 billion, while FDI commitments have grown by 34% YoY to USD 25.5 billion, which continues to reflect the rise of Vietnam as a low-cost manufacturing destination.

Mongolia was once again the highest contributor to performance this month as the economy continues to recover from a bottom on the back of rising coal and copper exports. On the political front, on 7th September the Mongolian People’s Party, with its super majority in Parliament, voted to oust the current government due to the MPP’s Presidential candidate having lost the July election. On 25th September U. Khurelsukh was elected in a landslide win, with 64% of the votes, against two other candidates for the position of Prime Minister and was approved for the position on 4th October. After the new government is created we would hope to see it advance discussions on several mega projects, including the consortium of Shenhua, Sumitomo and Mongolian Mining Corporation to operate and develop the government owned Tavan Togloi coking and thermal coal deposit, in addition to construction of a railroad and mine-mouth power plant.

The Sri Lankan government introduced a new tax bill and some of the major positives are the incentives given to new investments in the form of tax concessions and an increase in the tax exempt threshold for employment income, which could be positive for disposable incomes going forward.

The largest negative contributor to performance was the fund’s biggest holding, a Bangladeshi pharmaceutical company, whose GDR the fund holds and which is trading at a discount of 48% to the local listing. Fundamentally this company has shown better than industry growth this year with the outlook also being positive. Therefore, we believe the fundamentals will eventually be reflected in the price.

The best performing indexes in the AAFF universe in September were Mongolia (+18.4%), Pakistan (+2.9%), and Vietnam (+2.8%). The poorest performing markets were Iraq (-1.9%) and Laos (-1.8%). The top-performing portfolio stocks this month were (like the previous two months) all from Mongolia: a construction materials company (+45.1%), a cashmere producer (+44.2%), a brewery (+39.4%), a commercial property company (+37.5%), and an apparel company (+31.8%).

In September, we added to existing positions in Laos, Mongolia, Pakistan, Papua New Guinea, Sri Lanka and Vietnam and we exited a Bangladeshi pharmaceutical company. Additionally, we partially sold six companies in Mongolia.

As of 30th September 2017, the portfolio was invested in 117 companies, 1 fund, and held 3.7% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (7.6%) and a pump manufacturer from Vietnam (3.0%). The countries with the largest asset allocation include Vietnam (28.3%), Pakistan (21.2%), and Bangladesh (16.1%). The sectors with the largest allocations of assets are consumer goods (30.5%) and industrials (14.7%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 15.92x, the estimated weighted average P/B ratio was 2.74x, and the estimated portfolio dividend yield was 3.97%.