Asia Frontier Capital (AFC) – January 2017 Newsletter

“What you pay for an investment is the single biggest determinant for
how successful that investment will be. When equity prices are high,
your returns will be lower. When they are cheap,
your returns will be higher.”

– Barry Ritholtz

AFC Funds Performance Summary

The team at Asia Frontier Capital would like to wish all our readers a happy,
healthy, and prosperous Year of the Rooster!

January 2017 was generally a positive month for our frontier markets, with most of them posting significant advances. Asia Frontier Capital benefited from this and all our funds went up nicely.

During January, all our funds received additional inflows and combined, we have now surpassed the USD 50 million mark, with the AFC Vietnam Fund having crossed the USD 30 million level, the AFC Asia Frontier Fund is approaching USD 20 million in assets under management.

The AFC Asia Frontier Fund closed the month up +3.1% compared with the MSCI Frontier Markets Asia Index which went up +1.1% and the MSCI Frontier Index which was up +6.6%. The fund is now up +75.8% since inception, which corresponds to an annualized return of +12.4% p.a.

The AFC Iraq fund returned +10.9% in January, a strong confirmation of earlier signs of a turnaround.

The AFC Vietnam Fund returned +1.9% in January compared with the VN-Index in USD, which increased by +5.7%. The fund is now up +66.7% since inception, which corresponds to an annualized return of +17.5% p.a.

In the long term, frontier markets perform better than developed markets

As part of our long-only long term equity strategy, we like to be mostly fully invested in stocks in frontier markets. From a long-term perspective, this approach delivers a better return than investing in a diversified portfolio of US blue chip stocks or even in worldwide equities. Various studies of past returns of long term equity performance show that emerging market equities have outperformed US large cap and developed market equities. Additionally, research from various sources shows that long term expected returns for the next 10-15 years are higher for emerging and frontier market equities as compared with US large cap and developed market equities by a significant margin of 2% to 4% p.a. The table below shows the results of four different studies of past performance or expected returns over the long term.

Besides choosing and diversifying across different asset classes it is important to choose the exposure in each asset class carefully, as well as to diversify within each asset class. Over the long term, emerging and frontier markets have clearly proven to perform better than developed market equities and are forecast to continue to do so during the next 10-15 years, and so an appropriate allocation to emerging markets and frontier markets is a logical choice.

The estimates for future returns are based on the various market indices, and so on top of the mentioned expected returns our funds show a significant structural outperformance, indicating that our investors can expect a long term return well in excess of the above mentioned numbers.

We maintain our estimate of a net performance for our AFC Asia Frontier Fund and AFC Vietnam fund of 12-15% p.a. in USD terms. Last year both AFC funds exceeded these expectations.

  • Over the life of the fund, the AFC Asia Frontier Fund has met the expectation with an annualized performance of +12.4% p.a.
  • Since inception, the AFC Vietnam Fund has exceeded the expectation with an annualized performance of +17.5% p.a.

No excessive risk, low volatility, high Sharpe ratio:

It is also very important to note that this strong performance is the result of careful risk management and outstanding stock selection. We do not take higher risks in order to generate these returns. This can be seen from the low volatility of the funds with an annualised volatility of 9.16% for the AFC Asia Frontier Fund and 9.25% for the AFC Vietnam Fund, as well as from the healthy Sharpe ratios of 1.34 and 1.84 respectively.

Our conclusion is that frontier markets deserve a place in a well balanced portfolio as well as in an aggressive portfolio, and that the AFC Asia Frontier Fund and the AFC Vietnam Fund have shown that they are top contenders for this portion of such a portfolio.

As a result of continued great performance, it is not surprising that we have again received numerous awards, and BarclayHedge has given us another 4 awards.

BarclayHedge, which for the past 38 years has specialized in fund performance measurement and portfolio management, recognized us this month with a #2 ranking in their Top 10 Awards for the monthly performance in December 2016 of the AFC Asia Frontier Fund in the category Emerging Markets Equity – Asia, and a #3 spot in the category Emerging Markets – Asia.

In addition, they awarded 3 of their Top 10 Awards for 2016 to us for the performance of the AFC Asia Frontier Fund and the AFC Vietnam Fund. In fact, the AFC Asia Frontier Fund was ranked 4thin the category Emerging Markets Equity – Asia and 7th in the category Emerging Markets – Asia while the AFC Vietnam Fund was ranked 8th in the category Emerging Markets Equity – Asia. A truly remarkable feat that the only two Asia funds we have are both in the top 10. These rankings attest to not only being focused on the most appealing asset class, but also to outstanding execution of our fund management capabilities.

AFC Asia Frontier Fund’s Awards for performance in December 2016: 3rd and 2nd place out of 149 funds and 117 funds respectively:

AFC Asia Frontier Fund’s Awards for performance during calendar year 2016: 7th place and 4thplace out of 149 funds and 117 funds respectively:

AFC Vietnam Fund’s Awards for performance during calendar year 2016: 8th place out of 117 funds.

Asia Asset Management has chosen Asia Frontier Capital and the AFC Vietnam Fund and its Fund Manager Vicente Nguyen as winner in their Best of the Best 2017 Awards for Vietnam – Most Innovative Product, and Vietnam – CIO of the Year respectively.

As the last newsletter was lengthy with its detailed 2016 review and 2017 outlook, in this newsletter, we will be more brief. First, we have a look at the performance of the AFC Asia Frontier Fund and the manager comments for the month. Subsequently we consider the AFC Iraq Fund, and the AFC Vietnam Fund. We close this month’s newsletter with a travel report about Myanmar.

AFC in the Press

20-01-2017 Hedge Fund Intelligence (HFI) : AFC Asia Frontier Benefits from Pakistan Bangladesh Vietnam

Upcoming AFC Travel

If you have an interest in meeting with our team during their travels, please contact Peter de Vries at


AFC Asia Frontier Fund – Manager Comment January 2017

AFC Asia Frontier Fund (AAFF) USD A-shares gained +3.1% in January 2017. The fund outperformed the MSCI Frontier Markets Asia Index (+1.1%) and the MSCI World Index (+2.4%) but underperformed the MSCI Frontier Markets Index, which was up +6.6%. The USD A shares achieved a NAV of USD 1,757.74 which is a new all-time high (the previous high was in December 2016 with USD 1,704.18). The performance of the AFC Asia Frontier Fund A-shares since inception on 31st March 2012 now stands at +75.8% versus the MSCI Frontier Markets Asia Index (+15.5%) and MSCI Frontier Index (+9.6%) during the same time period. The fund’s annualized performance since inception is +12.4% p.a. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.16%, a Sharpe ratio of 1.34 and a correlation of the fund versus the MSCI World Index USD of 0.35, all based on monthly observations since inception.

The year began on a positive note and performance was led by the fund’s biggest holding, a Bangladeshi pharmaceutical company, which released good numbers for the recent quarter. The fund’s Mongolian resource holdings also did well while Pakistan continued to rally. The Sri Lankan market corrected by 1.5% driven by an uncertain macro environment but a few of the companies have so far posted good results for the recent quarter. Vietnam was a drag on performance as banking stocks, which have a high weight in the index rallied as the State Bank of Vietnam postponed Basel II requirements by two years. This is not surprising as some of the banks are not well capitalized and given that credit growth has been a driver of GDP growth the postponement in Basel II requirements can help with credit growth to some extent. However, dilution is going to occur sooner or later for some of the banks and hence we have stayed on the side lines.

The well run and well capitalised banks in Vietnam are also quite expensive at close to 3.0x price to book so we would prefer to wait. There was also speculation that the government may further open up foreign limits in the banks but this could possibly be on a case by case basis. We have instead increased our exposure to a Pakistani bank where valuations are much more reasonable and the worries over shrinking margins seems to have been discounted, while loan growth has shown good numbers over the past few months. Key interest rates were held steady in Bangladesh and Pakistan as inflation is still under control.

The best performing indexes in the AAFF universe in January were Iraq (+14.3%), Bangladesh (+8.6%) and Vietnam (+4.9%). The poorest performing markets were Mongolia (-1.8%) and Sri Lanka (-1.5%). The top-performing portfolio stocks this month were all from Mongolia, with one exception: an oil exploration company (+143.1%), a gold exploration company (+33.3%), and another gold exploration company (+25.7%). An oil exploration company from Iraq was up 38.9%.

In January, we added to existing positions in Mongolia, Pakistan, and Vietnam and partially sold four Mongolian holdings and one Pakistani pharmaceutical company. We newly added a Mongolian copper exploration company and a Pakistani IT logistics company.

As of 31st January 2017, the portfolio was invested in 107 companies, 1 fund and held 3.9% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (9.7%) and a Pakistani pharmaceutical company (5.4%). The countries with the largest asset allocation include Pakistan (26.9%), Vietnam (25.3%) and Bangladesh (18.3%). The sectors with the largest allocation of assets are consumer goods (30.6%) and healthcare (20.8%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 18.84x, the estimated weighted average P/B ratio was 3.87x and the estimated portfolio dividend yield was 2.99%.

For more information about Asia Frontier Capital’s Asia Frontier Fund please click the following links:

AFC Iraq Fund – Manager Comment January 2017

AFC Iraq Fund Class D shares returned +10.9% in January as the market built on the momentum of the last few months and affirmed the start of a bull market.

The equity market started the year with a strong rally dominated by banking stocks which accounted for 66% of the index’s gain for the month. Turnover continues to be at the upper end of the last 52 weeks with high volumes during the market’s strong upside momentum days and lower volumes otherwise (chart below), which are positive signs and a feature of a bullish market phase. Another encouraging sign is that high-quality banks, which severely lagged the low-quality ones in performance in the last few months, began to exhibit leadership. Trading was dominated by local retail investors with small but increasing foreign participation and still almost zero foreign selling (chart below). The fund’s underperformance versus the Rabee RSISX USD (which returned +16.5% in January) was caused by the higher concentration of banks in the index at 65% gaining an average of 19% vs. 42% weighting in the fund gaining an average of 16%, which will dissipate with the broadening of the rally and the momentum pickup in higher quality names.

10-day avg. of turnover index on the Iraq Stock Exchange (ISX) (green)
vs 10-day of avg. of net foreign activity (red)

(Source: Iraq Stock Exchange (ISX), AFC)

The market price of Iraqi Dinar (IQD) vs the USD, a prime beneficiary of the government’s improved finances, has improved by about +1.8% for the month lowering the premium over the official exchange rate to about 8% from just under 10% that developed over 2016. This is still above the normal range of 2-4% leaving room for further narrowing of the premium.

Official IQD/USD rate (grey), Market IQD/USD rate (red),
Spread (green) RHS

(Source: Central Bank of Iraq, AFC. The spikes in 2012, 2013 and 2015
were a result of CBI polices that aimed to control the demand for USD but
were abandoned when they raised market prices.)

However, the improvement in liquidity is still in the early phases, with overall liquidity in the economy and the market still scarce plus the known risks of the last two years are present. As such, irrespective of the strong start of the year, the recovery will likely be in fits and starts and the opportunity continues to be to acquire attractive assets that have yet to discount a sustainable economic recovery. However, signs of confidence are emerging with Asiacell Communications, whose business was severely challenged by the ISIS war of the last two years, resuming the payment of cash dividends with a declaration of a 3.7% dividend.

Supporting liquidity improvements is Iraq’s continued rehabilitation in the eyes of foreign investors with the government raising USD 1 billion in 5-year bonds guaranteed by the US, with a 2.1% yield vs the current 8.3% yield on its current outstanding bond (USD 2.7 billion, issued 2006, due 2028 with a 5.8% coupon). Underpinning this rehabilitation is a combination of the changed perception of oil prices and crucially the battle against ISIS which has gained momentum in the last three weeks after the inevitable grind-down as the battle reached the city centre of Mosul. Iraq’s PM has recently reported that the message from the Trump administration was for an increased support for the war against ISIS.

After gaining an average of +8% per month since September, the market is due for a pull-back or a consolidation in February. However, as impressive as these gains are, they represent just a 30% retracement of the -68% decline from 2014 peak to 2016 multi-year lows supporting the thesis that the market has significant catching up to do in the long process of discounting the end of conflict and the subsequent recovery.

Rabee Securities’ RSISUSD Index (red), 200 day moving average (green)

(Source: Iraq Stock Exchange (ISX), Rabee Securities, AFC)

Finally, confidence in the catch-up potential is reinforced by the chart below (often cited last year) suggesting that the correlation history shows the index, even with the strong recent gains it still significantly behind in performance to these of the bond and oil prices.

Rabee Securities’ RSISUSD Index (green),
Iraq’s USD 2.7 bn Bond (gold) and Brent Crude (red)

(Source: Bloomberg)

As of 31st January 2017, the AFC Iraq Fund was invested in 14 names and held 1.0% in cash. As the fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq, the countries with the largest asset allocation were Iraq (97.6%), Norway (2.1%), and the UK (0.3%). The sectors with the largest allocation of assets were financials (58.1%) and consumer staples (23.3%). The estimated trailing median portfolio P/E ratio was 13.90x, the estimated trailing weighted average P/B ratio was 1.04x, and the estimated portfolio dividend yield was 2.47%.

For more information about Asia Frontier Capital’s Iraq Fund, please click the following links:

AFC Vietnam Fund – Manager Comment January 2017

The AFC Vietnam Fund returned +1.9% in January with an NAV of USD 1,667.11, bringing the net return since inception to +66.7%. This represents an annualized return of +17.5% p.a. By comparison, the January performance of the Ho Chi Minh City VN Index was up by +5.7% while the Hanoi VH Index increased by +6.2% (in USD terms). Since inception, the AFC Vietnam Fund has outperformed the VN and VH Indices by +38.7% and +51.2% respectively (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 9.25%, a Sharpe ratio of 1.84 and a correlation of the fund versus the MSCI World Index USD of 0.30x, all based on monthly observations since inception.

With a strong rally in index heavyweight banking stocks, the indices advanced strongly in January while the broader market remained steady.  The index in HCMC increased by 4.9% in local currency while the index in Hanoi gained 5.4%. With a slightly stronger Dong our NAV increased by +1.8%.

Market developments

Banking stocks rallied strongly, some of them increased by up to 30% last month with the announcement of raising the foreign ownership limit (see comment below). This mainly impacted higher quality banking stocks with a full foreign ownership at 30%; which means that only investors already owning these stocks were able to participate in this rally. With our investment strategy of aiming to achieve a stable performance from a broad diversified portfolio with evenly weighted stocks between 1-3%, holding one or two volatile banking stocks wouldn’t have made a huge difference in our monthly performance.

Asia Commercial Bank from Jan 2012 to Jan 2017

(Source: Bloomberg)

Nevertheless, this banking stock rally improved the overall technical market picture with the Ho Chi Minh City Index now trading at its highest level since 2008 while the Hanoi index is still trading within its now already 5 year old trading range.

Ho Chi Minh City Index from July 2001 to Jan 2017

(Source: Bloomberg)

Interestingly, the small cap index, which is trading in a consolidation phase since last summer, recovered along with the broader market over the last two days which benefitted our portfolio as well. Of course, we are confident that this trend will continue during the new Chinese Year of the Rooster.

Vietnam Small Cap Index from July 2016 to Jan 2017

(Source: Bloomberg)

With reporting season just starting, we are looking to adjust our portfolio holdings according to our model over the next few weeks.

Vietnam’s Premier to Raise Foreign-Investor Caps on Banks

Vietnam will increase the foreign ownership limits (FOL) on banks as early as this year to speed up the overhaul of the nation’s banking system and further lure overseas investments to boost economic growth, according to Prime Minister Nguyen Xuan Phuc.

The current foreign ownership limit of listed banks is 30%, but Phuc didn’t specify the new ceiling which will be introduced later this year, and he indicated that the government may sell out completely from the more troubled banks.

The banking sector in Vietnam has considerable growth potential. According to a 2015 World Bank report, only 30.9% of the population in Vietnam is using banking services, which is quite low compared to the world average of 62%. Most banks in Vietnam are generating 70-90% of their profits from traditional lending and are still very “old fashioned”, offering hardly any electronic banking services.

Population over 15 years old that hold bank accounts

(Source: World Bank)

Even with an increase of the ownership limits, not all banks would become potential targets of foreign investors. Some of the listed banks have no more foreign room left, such as Asia Commercial Bank (ACB), Military Bank (MBB) and Viettinbank (CTG). But there are still some banks with room for foreign investors, such as for example BIDV, Vietcombank (VCB), Sacombank (STB), Saigon Hanoi Bank (SHB), Navibank (NVB) and Vietnam International Bank (VIB). An increase of FOL’s is certainly creating a boost in banking stocks in the short term, but in the long run, Vietnam still needs to improve its overall banking regulations and management before they are able to attract significant foreign capital. It is expected that potential strategic foreign investors would bring in valuable know-how, which is desperately needed in order to further improve this sector.

(Source: Viet Capital Securities)


Vietnam is celebrating its Lunar New Year (Tet) from 26th January to 1st February this year and hence most economic numbers will only be announced in the first week of February.

According to the Ministry of Agriculture, total agricultural export revenue in January was USD 2.54 billion, slightly lower (-1.5%) compared to the same period last year.

Despite the US withdrawal from the TPP Agreement, Vietnam is confident that overall exports to the US will continue to grow, although some of the textile and garment manufacturers have reduced their growth target from 30% down to 12%.

Other developments

Thanks to significant government efforts, doing business in Vietnam is getting much easier. Setting up a new company takes now only five days compared to one month just one decade ago. In 2016, the number of new established enterprises hit a record high of 101,100, surging 16.2% against 2015. A lot of small businesses do not need to register with the authorities anymore. It is expected that the improvements of administrational bureaucracy will stimulate economic growth going forward.

At the end of January, the fund’s largest positions were: Sam Cuong Material Electrical and Telecom Corp (2.9%) – a manufacturer of electrical and telecom equipment, Agriculture Bank Insurance JSC (1.9%) – an insurance company, Vietnam Livestock Corporation JSC (1.9%) – a livestock and animal feed company, Global Electrical Technology JSC (1.9%) – an electrical and IT equipment manufacturer, and Bao Viet Securities JSC (1.8%) – a securities brokerage company.

The portfolio was invested in 84 names and held 2.6% in cash. The sectors with the largest allocation of assets were consumer goods (34.3%) and industrials (26.2%). The fund’s estimated weighted average trailing P/E ratio was 9.68x, the estimated weighted average P/B ratio was 1.59x and the estimated portfolio dividend yield was 6.57%.

For more information about Asia Frontier Capital’s Vietnam Fund please click the following links:

AFC Travel Report – Myanmar

In line with our process of being on the ground in the countries we invest in, Scott Osheroff, Analyst at Asia Frontier Capital, travelled to Myanmar and conducted meetings with portfolio companies and other companies on our shortlist. The photos in this article are all by AFC.

Isolated for a quarter century, Myanmar is a land of contrasts but nonetheless an Asian tiger economy in the making. Myanmar is developing at such a rapid rate that at times what you read in the news is already outdated by the time you set foot on the ground.

I arrived at Yangon International Airport, which has two terminals – terminal one being the newer of the two which was commissioned last summer and terminal two, the older. Arriving via Ho Chi Minh City on VietJet Airlines I was scheduled to arrive in terminal two. However, as the plane pulled up to the gate and I peered out of the window, the terminal looked to be undergoing final construction. Naturally, I figured we arrived at terminal one and as I disembarked the airplane walking down a brand new corridor I was sure this was the case. However, upon asking the lone immigration officer in an empty, brand new, arrival hall he corrected me saying we were in terminal two. While this might not seem significant, I was dumbfounded as I had anticipated something less than modern, but in fact terminal two’s renovation has made it more modern than the international airport in Saigon and leaps and bounds ahead of many regional airports in the United States. Not on the ground for more than ten minutes, this is when I knew it would be wise to disregard much of the media I had previously absorbed since the country’s opening in 2012.

Another stereotype, if you will, is that the telecommunications network is poor. However, as the AFC Asia Frontier Fund has indirect exposure to telecom tower construction companies, it is no secret that Myanmar is pushing for universal coverage in an expeditious manner. SIM cards which previously cost thousands of dollars now cost less than three dollars and in Yangon telecom operators are rolling out a 4g network. My cell coverage was better than in some developed countries, a pleasant surprise indeed.

Not only is the network relatively fast and reliable, but walking the streets of Yangon it seems that everyone has either been saving over the past several years or has financed the purchase of a new Huawei, Samsung, or iPhone. This would be a ripe market for consumer electronics retailers such as Mobile World which is listed in Vietnam.

Mall culture and retail has also catapulted into the 21st Century. Last year the first modern mall, Myanmar Plaza, built by Vietnamese listed Hoang Anh Gia Lai, opened. Inside and in the general area one need not look far for international brands including L’Occitane, KFC, Lotteria, Gloria Jeans, Coffee Bean & Tea Leaf, Ya Kun Kaya and many others which are catering to a small, but growing, middle class seeking new experiences.

Some of the many retail stores at the newly opened Myanmar Plaza.

Citimart’s “Marketplace” supermarket.

On my first day in town I focused on getting my bearings and hence prepared to get lost wandering the downtown area. Staying across the street from the newly branded Shangri-La Hotel (previously the Trader’s Hotel), I walked south where I had the opportunity to absorb the city’s stunning, albeit crumbling, colonial architecture. Passing by the Sule Pagoda I flanked left, towards what may emerge as the country’s financial district, and then towards the river where I came across a small, unofficial ferrying point with people shuttling goods from across the Yangon River. Later that evening I found myself in a large street fair which was being held to celebrate the end of the Buddhist fast. The streets were at capacity with people as music blared and vendors paraded their pythons amongst endless street food stalls and the most interesting Ferris wheels I’ve ever come across—they are human powered!

Sule Pagoda.

Downtown Yangon.

Regarding the country’s young capital markets, on my final day in Yangon I had the opportunity to visit the three listed companies on the Yangon Stock Exchange (as of today, there are four listed companies), Myanmar Thilawa SEZ (MTSH), Myanmar Citizen’s Bank (MCB) and First Myanmar Investments (FMI). During my meeting with the exchange they expressed their interest in seeing the new Companies Act being passed and for the law banning foreign ownership of local bank accounts being lifted as this would pave the way for foreigners to trade on the YSX and hence drive liquidity and institutional investors as most of the market at present is local retail. In time, this will surely occur and Myanmar has not only learned from the mistakes of the Laos and Cambodian exchanges, but also has the economic “depth” to see a large number of companies float shares in the coming years which could make the market more dynamic than other ASEAN markets.

The Yangon Stock Exchange just after the opening bell.

Of the listed companies I met, Myanmar Thilawa SEZ (MTSH) was the standout. Having acquired a 70-year lease agreement from the previous government, MTSH has developed Phase I of their 2,500 hectare land package just south of Yangon. Having received interest from regional as well as European and East Asian companies to build factories for everything from electronics to fertilizer to garments, MTSH is a key driver in Myanmar’s focus on sector diversification. Creating an environment to attract export industries will be key over the coming years to help ensure a stable Kyat, the local currency, as well as to provide employment opportunities for the country’s 53 million citizens as many move off the farm and into cities in search of better lives. It’s clear that this push towards industrialization is already underway as garment exports during 2016 doubled, reaching USD 1.05bln versus USD 460mln in 2015.

Myanmar’s story is a young and expectedly bumpy one, but the country will continue in the direction of openness, transparency, rapid growth, and industrialization, and we intend to be actively involved.

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