Four questions with frontier investor AFC

Jan 05, 2018
Thomas Hugger is CEO of Hong Kong-based Asia Frontier Capital

Tell me a bit about your company.

Asia Frontier Capital (AFC) is a boutique fund management company based in Hong Kong that focuses on investments in Asian frontier markets. Our flagship fund is the AFC Asia Frontier Fund, which was launched at the end of March 2012. We also just launched a Luxembourg-based parallel fund for European investors.

Additionally, we have two single country-focused funds: the AFC Vietnam Fund and AFC Iraq Fund. All the funds we are managing are long-only equity funds with a strong bottom-up, fundamentals approach and a focus on undervalued stocks.

Could you describe your investment process? Does it differ according to countries/regions?

Very broadly, we follow a combination of top-down and bottom-up approaches. We use a top-down approach to allocate capital across our markets and prefer to invest in countries that have a stable-to-improving macro environment with respect to their current accounts, foreign reserves and interest rate cycle.

Once we allocate capital to specific markets, we select stocks using a bottom-up approach with a focus on value and Garp; we tend not to chase very expensive stocks even if they are very well-known names. In addition, our core investments are focused on the consumer sector, or industries that are linked to consumer spending such as healthcare, telecom and financial services.

Various countries are at different stages of their economic cycle. For example, Vietnam is seeing very strong industrial growth so we would also focus on sectors such as infrastructure and construction in this market. Certain countries are also strong in specific industries – such as Mongolia in resources or Cambodia in tourism – so our investments would focus on those sectors.

Which frontier country do you believe will offer the best opportunities in 2018?

We believe Pakistan offers the best investment opportunities for 2018. Last year it was upgraded by MSCI from a frontier market to an emerging market. After its inclusion in the MSCI Emerging Markets Index, the market in Pakistan started to correct after a bull run of several years, and ended 2017 down 15.3 percent. It now trades at a trailing P/E ratio of just eight.

Despite the macro and political uncertainties over the past year, we believe current valuations discount most of this uncertainty and, with a longer-term view in mind, we believe Pakistan has a very bright future ahead thanks to China’s One Belt, One Road (Obor) initiative.

The Chinese government and Chinese companies have committed to invest more than $60 bn into Pakistan, mainly into infrastructure projects like ports, roads, railways and – most importantly – power generation. Currently, in many parts of Pakistan (even in parts of Karachi) consumers have access to power for only eight hours a day! This proposed improvement to power supply could, therefore, add 1 percent to 2 percent to GDP growth and could be a platform for further economic momentum.

In addition to the Obor investments, Pakistan has a population of 200 mn, mostly young people with rising disposable incomes, which makes it an attractive consumer market. Indeed, most consumer industries in the country, such as automobiles, consumer appliances and consumer finance, are still very under-penetrated compared with similar-sized economies.

This consumer spending is further being aided by a significant improvement in the security environment, which is leading to positive sentiment among consumers as well as corporates. In our view, this all makes Pakistan a great long-term story over a three to five-year horizon.

How would you describe the level of investor relations at the firms you invest in, and what would you like to see improve?

The quality of IR depends on the country as well as the size of the company. In markets such as Mongolia there is typically hardly any dedicated IR function so we meet directly with the CEO or CFO. In Vietnam, the larger companies now have an IR team – this was not the case a few years ago – while for small to mid-sized companies investors usually meet with senior management. The trend to set up IR teams is only beginning.

In markets such as Bangladesh, Pakistan and Sri Lanka, some companies have an IR executive/team and some don’t. This isn’t because management teams are trying to evade or avoid investors but because many of them have never been exposed actively to institutional investors. This is now beginning to change, however.

We would like to see a more proactive approach with respect to investor relations from companies in Asian frontier markets, especially from those that have seen an increase in institutional ownership over the past few years.

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