Asia Frontier Capital Newsletter – November 2015

“Knowledge is Power”
– Francis Bacon

AFC Asia Frontier Fund (AAFF) USD A-shares declined -3.4% in November 2015. This month the fund outperformed the MSCI Frontier Markets Asia Index (-7.2%) and the MSCI Frontier Markets Index (-4.6%) but underperformed the MSCI World Index (-0.7%). The year to date performance of the AFC Asia Frontier Fund A-shares stands now at -2.1% versus the MSCI Frontier Asia Index which is down 18.0% during the same period.

The AFC Iraq Fund Class D shares returned -3.4% in November 2015, an outperformance against the Rabee USD Index (RSISUSD) which returned -9.0% in USD terms. The fund has outperformed the RSISUSD by +6.8% since inception.

The AFC Vietnam Fund returned -1.8% in November bringing the net returns since inception to +41.5%. By comparison, the performances of the Ho Chi Minh City VN Index and the Hanoi VH Index were -6.3% and -2.7% respectively (in USD terms). Since inception the AFC Vietnam Fund has outperformed the VN and VH Indices by +30.9% and +35.9% respectively, in USD terms.

Thomas Hugger chosen by Citywire/Lipper as the Number One Frontier Markets Equity Manager

Last month we wrote about  Citywire’s league table of Frontier Funds. A table that featured the AFC Frontier Fund at the top spot, both in terms of performance as well as lowest risk. Last week Citywire wrote a  research piece about the Top Performing Frontier Markets Equity Managers. Some of our readers may have seen our earlier announcement about this a few days ago. We have listed the top 5 rated frontier equity managers from that article here to compare their fund performance and risk over the last 36 months.

Source: Citywire, Asia Frontier Capital

For further reading please click here: Citywire’s Article “the Top-performing Frontier Markets Equity Managers Revealed”

If you have any questions about our funds or would like any additional information please be in touch with our team at


AFC Investment Conference – Sri Lanka

We announced in last month’s newsletter our intention to organize our second AFC investment conference. It will be held in Sri Lanka from 29th February 2016 to 2nd March 2016. We received strong interest and would like to let you know a bit more.

The investment conference will be held at the Cinnamon Lakeside Hotel in the centre of Colombo and is titled “Benefitting from Strong Growth in Frontier Economies while Managing Risk”.

If you are not familiar with Colombo, it is the bustling capital city of Sri Lanka and the country’s economic centre. For tourists it is the hop-off point for beaches in the island nation’s south. It has a long history as a port on ancient east-west trade routes, ruled successively by the Portuguese, Dutch, and British. That heritage is reflected in its spicy cuisine as well as its architecture, mixing colonial buildings with high-rises and shopping malls.

We expect participation from a number of investment experts and company executives as well as representatives of local institutions that have extensive experience investing in Asian frontier economies like Bangladesh, Pakistan and Sri Lanka. They will share with you their views on the macroeconomic outlook for Asian frontier markets and exchange rate developments, as well as developments of the markets in individual business sectors. In addition, presentations will cover the characteristics of individual local companies and related topics.

If you are interested in attending the conference, the cost will be $1,500 not including hotel stay and flights. To register, please send us an email (if you haven’t already done so) at and we will contact you with further details.

AFC in the Press

 • 26-11-2015 Thomas Hugger wins #1 Spot in Citywire/Lipper’s Frontier Markets Equity Managers Review
 • 27-11-2015 Phnom Penh Post: Thomas Hugger comments on Cambodia’s FDI Growth
 • 11-11-2015 The Phnom Penh Post – Share price set Port’s USD 5.2 million IPO
 • 05-11-2015 Phnom Penh Post: Thomas Hugger comments on PSEZ sweetening its IPO plan

Upcoming AFC Travel

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

 Singapore  8th – 11th December  Andreas Vogelsanger
 Phnom Penh  10th – 21st December  Scott Osheroff
 Ho Chi Minh City  22nd December – 10th January  Scott Osheroff
 Zurich  17th December  Thomas Hugger
 Hong Kong  18th – 22nd December  Andreas Vogelsanger

AFC Asia Frontier Fund – Manager Comment

AFC Asia Frontier Fund (AAFF) USD A-shares lost -3.4% in November 2015. This month the fund outperformed the MSCI Frontier Markets Asia Index (-7.2%) and the MSCI Frontier Markets Index (-4.6%) but underperformed the MSCI World Index (-0.7%). The year to date performance of the AFC Asia Frontier Fund A-shares stands now at -2.1% versus the MSCI Frontier Asia Index which is down -18.0% during the same period.

Frontier and emerging markets continued to remain volatile, as has been the case so far in 2015, as investor sentiment remained weak. Though markets have been volatile this year, the fund has exhibited lower volatility than the MSCI Frontier Markets Asia Index and the MSCI Frontier Markets Index due to its diversified approach. In 2015, the fund has exhibited an annualised volatility of 8.5% based on monthly observations compared to annualised volatilities of 18.9% and 12.0% for the MSCI Frontier Markets Asia Index and the MSCI Frontier Markets Index respectively.

The major event in AFC’s key markets during the month was the announcement of the Sri Lankan budget. Prior to the announcement there were concerns that the government could take some tough taxation measures in order to increase tax revenues, but the measures proposed were not the worst outcome. On the taxation front, the Nation Building Tax, which is a kind of turnover tax, was increased from 2% to 4%. The sector which will likely see a negative impact due to taxation changes is the banking sector. Effective tax rates have been increased and this will impact earnings growth and RoEs in the coming year. The tiles/ceramic sector will likely also experience a negative impact, as imported tiles/ceramic products will now face lower import duties leading to increased competition for the domestic tiles/ceramic industry.

On the positive side, the organized retail trade will benefit in terms of lower taxes due to the removal of Value Added Taxes which were payable on turnover. The government would also like to exit certain state owned companies in the healthcare and leisure sector and this is probably a good sign of the government wanting to reform. On the individual level, the tax free income bracket has been increased from LKR 750,000 annually to LKR 2.4 million annually and this is positive for disposable income. Since most of the tax measures proposed are indirect in nature, they will probably be passed on to the consumer which could lead to some increase in inflation and interest rates may move up in 2016. Also, the fiscal deficit is expected to stay at around 6% which is similar to the previous year and therefore the deficit number needs to be watched if interest rates begin to move up.

In Vietnam, the heavily weighted banking sector saw a decline as the execution of mergers between larger banks with smaller weak banks led to negative sentiment. The fund does not hold any Vietnamese banks at the moment, instead maintaining a larger exposure towards cyclical infrastructure and also consumer-related companies.  One of the construction companies which is a top holding in Vietnam was up +18% on the back of good quarterly numbers. In Pakistan as well, the heavily-weighted banking sector saw a decline as worries of declining spreads and reinvestment risk continue but some Pakistani banks now look attractive keeping 2016 in mind. At the moment, the fund does not hold any Pakistani banks. Further, some of the fund’s larger holdings in Pakistan corrected and this was a drag on performance.

Though the Bangladeshi market was flat, the fund’s second largest holding, a Bangladeshi generic pharmaceutical company, was in the news as it received approval from the US Food & Drug Administration (FDA) for its blood pressure drug which will allow the company to manufacture and export the drug to the US. This is the first time a Bangladeshi pharmaceutical company has got approval to begin exports to the US which could be a sign of things to come for the Bangladeshi pharmaceutical industry. This stock was up +9.8% during the month and helped with relative performance. Iraq continued to face pressure but certain holdings such as a telecom company and beverage company rallied towards the end of the month and this helped with relative performance as well with the telecom company up 15.5% and the beverage company up by 8%.

The best performing indices within the AAFF universe in November were Cambodia (+4.4%), followed by Bangladesh (+0.4%) and Laos (-0.1%). The poorest performing markets were Iraq (-8.1%) and Pakistan (-5.9%). The top-performing portfolio stocks were a Vietnamese construction company (+18.4%), followed by an Iraqi mobile phone operator (+15.5%), an oil producer from Papua New Guinea (+15.4%), and a Mongolian bakery (+14.0%).

In November, we added to existing positions in Laos, Mongolia, Pakistan, and Vietnam. We completely exited a utility company in Bangladesh and continued to reduce our holding in one company in Sri Lanka. Newly added positions to the fund’s portfolio were a frozen food producer in Bangladesh, a shoe retailer in Pakistan, and a jewellery retailer in Vietnam.

As of 30th November 2015, the portfolio was invested in 106 companies, 1 fund and held 6.3% in cash. The two biggest stock positions are a pharmaceutical company in Pakistan (5.7%) and a Bangladeshi pharmaceutical company (5.6%). The countries with the largest asset allocation include Vietnam (29.8%), Pakistan (19.0%) and Bangladesh (13.2%). The sectors with the largest allocation of assets are consumer goods (41.7%), healthcare (14.4%) and materials (13.9%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 15.25x, the estimated weighted average P/B ratio was 1.50x and the estimated portfolio dividend yield was 3.32%.

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

AFC Iraq Fund Manager Comment

AFC Iraq Fund Class D shares returned -3.4% in November 2015, an outperformance against the Rabee USD Index (RSISUSD), which returned -9.0% in USD terms. The fund has outperformed the RSISUSD by +6.8% since inception due to our careful stock selection process.

In November, the AFC Iraq Fund continued to build positions in several Iraqi companies in the consumer and real estate sectors. It made no changes to current foreign listed holdings in the energy and oil sectors, which derive the majority of their business from Iraq. The fund has only undertaken buying activities and as yet has not made any full or partial exits.

The RSISUSD index’s decline of -9.0% for the month masks an intra-month decline of -20.3% taking it to lowest level in at least 3 years before rallying 14.2% from these lows. Total turnover of about USD 14.725 million was 60% higher than the multi-year lows levels of October. Most index constituents underwent similar volatility during the month: double digit underperformers were North Bank (-50%) which resumed trading following a 3 month trading suspension and in the process condensing 3 months of losses into 1, Mosul Bank (-19.4%), Bank of Baghdad (-17.9%), Ishtar Hotels (-31.6%), and Mamora Real Estate (-15.6%). Only two stocks were up for the month: Asiacell (+17.1%) and Baghdad Soft Drinks (+7.7%), whose gain was a combination of a (-21.4%) decline by mid-month followed by a (37.1%) recovery. The index is in deep bear market territory, down -30.4% YTD and down -32.1% from the June 2015 high.

Adding to strains on local liquidity were net-foreign outflows, as measured by proxy portfolio flows, for the second month in a row, after seemingly stabilizing over the last few months. Outflows in November, although in-line with the average for the year, increased from the summer levels, while inflows decreased significantly at about a quarter of the year’s monthly average. Combined with the preceding anaemic local liquidity, the index had a decline of -20.3% by mid-month, however, prices recovered meaningfully with the index rallying +14.2% while turnover expanded. The overall monthly performance is viewed positively in that local buying made up for the lack of foreign or portfolio buying, implying that the preceding negative local sentiment is turning around with locals eyeing opportunities in the market at these levels. The fund took advantage of cases of extreme selling to increase positions in certain holdings placing well for the turnaround.

Looking at the portfolio, as of 30th Nov 2015, the AFC Iraq Fund was invested in 14 shares and held 0.9% 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 (90.2%), Norway (6.1%), and the UK (3.8%). The sectors with the largest allocation of assets were financials (46.6%) and consumer staples (21.2%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 12.50x, the estimated weighted average P/B ratio was 1.17x and the estimated portfolio dividend yield was 2.26%.

Proxy Portfolio Flows

LHS : *Outside chart: Oct 13: + $14m inflow into IBSD,
Source: Rabee Securities, ISX, IDC and AFC,  RHS: Proxy flows: Source ISX, IDC & AFC

As if on cue, Baghdad Soft Drinks (IBSD), whose persistent summer decline was documented last month as a second example like Asiacell of a disconnect between price and valuation, declined by a further -21.4% by mid-month on the back of a -22.2% decline in October, before rallying by 37.1% to end the month with a +7.7% gain. After reporting continued strong earnings growth in Q3/2015 up 54% year over year for 4 quarters ending in Q3/2015, the stock trades at a P/E of about 9.2x and 1.2x book value. Asiacell’s journey by comparison was a decline of -55.1% from the year high in April to the lows in September before rallying by 54.7% by the end of November from these lows.

IBSD’s capitulation from the June highs to November lows of 55% might be an example of the stock market lore of “shooting the generals” which says the generals are the last to decline at market bottoms. However, while liquidity (both foreign institutional & local retail) remains low, the market will continue to witness volatility as the available liquidity moves from stock to stock which the fund intends to take advantage of should other stocks experience sell-offs.

Political developments

The Turkey-Russia spat over the downed plane is more of a side show and will likely lead to positive developments on the ground in Syria and Iraq which bode well for the eventual return of stability. The combination of the recapture of Sinjar by Iraq’s Kurdish forces with the aid of US air cover, advances by Syria’s Kurds against ISIS and advances by the Assad forces with Russian air cover and coalition attacks against ISIS controlled oil infrastructure are on their own small pieces, but the overall combination has the effect of cutting the lifelines feeding the overall structure of ISIS.

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

AFC Vietnam Fund – Manager Comment

To read this month’s fund update in German please click here.

The AFC Vietnam Fund returned -1.8% in November bringing the net returns since inception to +41.5%. By comparison, the performances of the Ho Chi Minh City VN Index and the Hanoi VH Index were -6.3% and -2.7% respectively (in USD terms). Since inception the AFC Vietnam Fund has outperformed the VN and VH Indices by +30.9% and +35.9% respectively, in USD terms.

There was a continuation of the positive trend in the first days of November, especially in popular blue chips such as Vinamilk and FPT, which increased +19% and +11% respectively within two weeks. Unfortunately this trend reversed and the same names declined sharply, in conjunction with outflows of foreign investors, which altogether led to uncertainty and falling prices across the board. After the strong increases in the previous month, this correction happened at the same time with many other markets in the region, and unfortunately also emerging market currencies came under pressure again, even though major currencies such as the Euro or Yen lost significantly more in value than the Vietnamese Dong.

Hence, the two indices in Ho Chi Minh City and Hanoi both declined and closed the month with a loss in USD terms of -6.3% and -2.7%. We took advantage of the rising stock prices over the last few weeks and did some important rebalancing of our portfolio in order to be optimally positioned for 2016. We realized some profits in many of our shares which rose sharply over the past few months and we adjusted quite a few positions after the 9 months earnings release in line with our valuation model. We finished this month with a negative performance of -1.8%, at an NAV of USD 1,415.47.

We will be celebrating our 2 year anniversary on December 23, and we therefore think it is a good time to analyse how and if Vietnam fulfilled our expectations.

VN30 Index

Source: Bloomberg

Most certainly, the turbulence in emerging markets and the weakness of those currencies have had a negative impact on the Vietnamese stock market, which was unable to reach its full potential in terms of absolute performance – the main index is only a mere 5.7% higher in USD terms since the date of our fund’s inception and the VN30 index which includes names of both indices down -3.5%. China’s slowdown of the economy and the associated slump in commodity prices, but also the sometimes rather sluggish implementation of important economic reforms such as the privatisation process and the changes in foreign ownership limits, were equally counterproductive for the development of Vietnam’s economy. It is important to note, however, that quite often comparisons are drawn between Vietnam and countries that enjoy a disproportionately higher state of economic development (such as e.g. Philippines, Malaysia, or Thailand) and in this respect the progress of the last two years can also be considered quite positive. Enormous future potential has arisen through various free trade agreements and the relatively well-functioning stock market – not yet the case for the bond and the soon to be launched derivative market – are providing a very attractive investment opportunity in Vietnam. Also the macroeconomic picture has significantly improved since 2013.

Two years ago, the main topics were inflation, banking crisis, or weak economic growth. Should there be no external shocks, Vietnam has now an economy which is on a solid path to a sustainable recovery with one of the highest GDP growth rates in the region.

It was interesting to note that the ANZ-Roy Morgan Vietnam Consumer Confidence Index continues to increase and stands now at 142.3, above the 2014 average of 133.3pts. The Vietnamese economy has remained immune to a regional trade recession, especially domestic sectors which are well insulated from the slowdown in trade growth regionally and internationally. The various Free Trade Agreements which Vietnam signed with e.g. Europe, Russia (Eurasia), TPP and ASEAN over the course of the past few months and years, will certainly help to keep the upward momentum in consumer confidence in at least the medium term intact. The trade deficit for the first 10 months of 2016 has reached USD 3.6bn, which is about 2.7% of total exports which are now standing at USD 134.4bn. HSBC wrote in a recently published report that Vietnam will be able to strengthen its position to become the world’s tenth largest exporter by 2050 with export value reaching USD 1.4 trillion.

Source: World Bank, Vietnam General Statistic Office

The current valuation of the stock market remains as attractive as in 2013, with a current 12 times earnings multiple for 2015. Our price earnings ratio of 7.7x for 2015 is only slightly higher than 6.6x at the time of our fund launch. We have been waiting for a major market breakout for a while, but it is precisely these two components (further reduction of undervaluation and growth) which give us confidence that this will happen soon.

HCMC Index

Source: Bloomberg

Thanks to our stock selection, we managed to achieve an impressive absolute return during the first 2 years of our fund, especially when considering how little the index moved over the same period. We are very curious to see how we will perform when the long-awaited market breakout finally happens!

Already slightly positive over the past few weeks are the significantly better development of small and mid-caps and the improving market breadth (advance / decline ratio), but we need to soon have a market rebound in order to eventually see a classic breakout of the index.

Vietnam Small Cap Index

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

AFC Travel Report: Cambodia

In line with our process of being on the ground in the countries we invest in, Scott Osheroff recounts his trip to Poipet, Cambodia where he visited company facilities and management.

Crossing into Cambodia for the first time in 2012 I entered through Poipet on the Cambodia-Thai border.  The Thai side was relatively orderly, but Poipet was like entering a post-apocalyptic world. With one mission—get through no-man’s land and into a taxi to Siem Reap as quickly as possible I walked double time through the casino gaming zone to immigration, passing through army checkpoints well stocked with AK47’s and by rag covered Cambodians taking the place of oxen in the transporting of massive wooden carts across the border. I figured that would be my first and final time in Poipet. I was mistaken.

Entrance to Poipet Cambodia from Thailand

Source: Asia Frontier Capital

In order to conduct a site visit to a casino owned by an Australian listed company—Donaco—last month I found myself in Siem Reap negotiating a taxi back to Poipet. In no time we were cruising down the national road playing a game of chicken with oncoming traffic at 120km/h. Arriving on a Sunday evening I was able to experience night life in Poipet and can safely say the city hasn’t changed too much since 2012.

In the typical fashion of border cities, Poipet is famous for many vices, however it is the Casinos which are legal and prospering as they draw tourists from Thailand where gambling is still prohibited A mere three hour drive from Bangkok, Poipet is a Mecca for gamblers looking to relieve their need to roll the dice.

The largest casino in Poipet is the Star Vegas Casino. Started by a Thai national, the Star Vegas was built into the most successful and professionally run operation in Poipet, until it was sold earlier this year to Donaco. With one Macau junket operating since September and the aim to attract yet others, Doncao is poised to expand into a regional powerhouse, dominating the competition, as Poipet modernizes.

Star Vegas Casino

Source: Asia Frontier Capital

In meeting with management the next morning, I was given a tour of the competition. As we visited each of the casinos on the main street I was continuously surprised as to the age of the machines and gaming tables. Besides the Star Vegas the other operations felt like the machines and tables had been transplanted from 1980’s Las Vegas.

That afternoon as I preparing to leave Poipet I was informed that while I had in fact never left Cambodia, if we departed through the main road out of no-man’s land immigration officials might desire to extort my driver for the sake of collecting some beer money. Thus, I was smuggled out of the area through back country roads which led into a nearby shanty town. From there we were able to re-access the main road  and continue the journey to Battambang.

From Poipet, I travelled south towards the rice bowl of Cambodia—Battambang. A Province in itself, Battambang city is a place many travellers bypass, preferring to see the temples at Angkor. However, Battambang is somewhat famous for what are called norries—bamboo frames on wheels used for transport on the French Colonial railway tracks. With no trains running on the regions railroad lines since the invasion of the Khmer Rouge, during the 1990’s Cambodians improvised the norry, creating a way to travel long distances through the countryside moving both people and goods. It was only a matter of time until they became a tourist attraction.

With new rail to be laid the norries will soon disappear into history and I seized the opportunity to take a ride while they still exist.

The norries of Battambang

Source: Asia Frontier Capital

Flying down the track towards a remote village at 40km/hour, which feels much faster as the tracks have not been maintained since the French Colonial era, on virtually every length of track the norry jolted and bounced due to the gaps between each section of track. Many jolts later and ponderings of when we would derail relief was found in oncoming traffic. In the instance of oncoming trains there would normally be a rail spur, though not in Battambang. The rule stands that the norry with the fewest people has to disembark. With only two people on ours we proceeded to disembark (taking the norry itself apart each time) allowing traffic to pass. Drivers used to this process, they seemed to be indifferent as to where we would let traffic pass. Sometimes this would occur in the middle of a village and yet other times in the jungle or in rice paddy—an experience not to be forgotten as fire ants were abound!

No maintenance in decades

Source: Asia Frontier Capital

I hope you have enjoyed reading this newsletter. If you would like any further information please get in touch with me.

We at Asia Frontier Capital would like to wish you and your family a Merry Christmas and all the best for a successful and profitable 2016.

With kind regards,

Thomas Hugger
CEO & Fund Manager


This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Iraq Fund, AFC Iraq Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.

The representative of the funds in Switzerland is Hugo Fund Services SA, 6 Cours de Rive, 1204 Geneva. The distribution of Shares in Switzerland must exclusively be made to qualified investors. The place of performance and jurisdiction for Shares in the Fund distributed in Switzerland are at the registered office of the Representative.

By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.

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