Frontier Markets Equity Fund

Risk Considerations

The Fund is actively managed and invests mainly in a diversified portfolio of shares of frontier markets companies.
Investment in the Fund involves risks, including general investment risk, equity market risk, risks associated with depositary receipts, frontier markets risk, risk associated with high volatility of equity markets in frontier countries, risk associated with regulatory/exchanges requirements of the equity markets in frontier countries, geographic concentration risk, small and mid-capitalisation shares risk and currency risk which may result in loss of a part or the entire amount of your investment.
The Fund may use derivatives for hedging and efficient portfolio management and is subject to derivatives risk. Exposure to derivatives may lead to a risk of significant loss by the Fund.
The value of the Fund can be volatile and could go down substantially.
Investors should not invest in the Fund solely based on this website.

Investment involves risk. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Overview

Manager's Outlook

We believe frontier markets have a natural place in an investor's global portfolio considering the long-term fundamentals and low correlation to other equity indexes. The macro fundamentals and demographics in many frontier markets today are favorable, and these economies have the potential to grow much faster than those in the developed and emerging markets universes. While the current global crisis brings investment opportunities, and the long-term growth outlook of many companies remains underpriced, we acknowledge that there will be individual winners and losers. Careful stock picking is therefore key and forms the core of everything we pursue.

In frontier Asia, we remain optimistic on the outlook for Vietnam. Following a challenging period with the coronavirus omicron variant and restrictive containment measures, we are pleased to see a catch-up in the vaccination rate and improving consumer sentiment on the ground. We believe that the country offers a very attractive long-term opportunity and find many compelling bottom-up ideas across sectors. Our holdings are focused on those companies that we believe are most able to execute well and benefit from the economy's strong structural growth potential.

We have become more optimistic on the outlook for Bangladesh following the loan program request it is working on with the IMF. This is due to the effects of rising inflation and declining foreign reserves on the country. We believe that the economy is well positioned for growth, and we are able to find companies with favorable valuations.

In frontier emerging market Pakistan, we are keeping a close eye on macroeconomics and geopolitics, particularly given the country's twin deficits, rising inflation, and currency depreciation. However, the government has agreed to tough adjustments in order to secure a USD 6 billion bailout package from the IMF. We focus on high-conviction ideas with strong bottom-up fundamentals, which are predominantly export businesses (meaning that they, in fact, benefit from currency weakness).

In Africa, Nigeria remains uninvestable despite the oil price, largely due to the strict capital controls that are in place. The equity market in Kenya is dominated by Safaricom, a large fintech provider, which was able to grow its services before and during the pandemic. We are concerned about the authorities' management of the economy and the currency.

In frontier emerging market Egypt, we are worried about the near term given the global forces at play. The economy is particularly vulnerable to the impacts of Russia's invasion of Ukraine. However, support from the IMF and select Gulf states should help the country to weather this challenging period.

Strategy

Fund Summary

Our research seeks to identify companies with superior and sustainable earnings growth at valuations that do not fully reflect that growth. We are constantly on the ground meeting with company management teams and industry experts in local frontier countries to uncover the long-term winners. The manager is not constrained by the fund's benchmark, which is used for performance comparison purposes only.

Performance - Net of Fees

Past performance is not a reliable indicator of future performance.

30-Nov-2023 - Johannes Loefstrand, Portfolio Manager,

Frontier equities rallied in November in US dollar terms, benefitting from the improved market sentiment at a global level. Investors were encouraged by signs of cooling inflation in both the US and Europe and indications from the US Federal Reserve that it could start lowering its policy rate if inflation continues to moderate over the next few months. At the portfolio level, our holding in a Vietnam-based information technology services company contributed to relative returns; its shares gained strong ground over the month following a pull-back in September and October when investors locked in recent profits. We remain bullish on the outlook for the Vietnam-based company, so it remains a key portfolio holding. Slovenia was another significant contributor to returns, led by our position in a bank whose shares rose following the release of its encouraging quarterly results. Conversely, our lack of exposure to a number of property companies weighed on relative performance as many of these stocks posted monthly gains well in excess of 20% over the month.

30-Nov-2023 - Johannes Loefstrand, Portfolio Manager,

As of the end of November, our main sector relative overweight positions were information technology and consumer discretionary while we were underweight utilities, real estate, industrials and business services, and health care. We also have a modest overweight position in financials and over the month we made a number of adjustments to our holdings within this sector. For example, we added to our existing position in a Slovenian bank; its latest results delivered a high return on equity and higher forwards guidance.

30-Nov-2023 - Johannes Loefstrand, Portfolio Manager,

Although we retain a significant overweight position in Vietnam, we recently reduced the overall extent of our exposure in order to manage country risk in the portfolio. This included trimming our positions in an information technology services company and a steelmaker. However, we still believe that Vietnam offers both a cyclical recovery and an exceptionally attractive long-term opportunity as it continues to have one of the highest GDP growth rates globally, and we find many compelling bottom-up ideas across sectors.

30-Sep-2022 - Johannes Loefstrand, Portfolio Manager,

We topped up our position in Vietnam Engine and Agricultural Machinery, a manufacturer of agricultural machines and a minority shareholder in several large multinational auto and motorcycle manufacturers. The company has a secured dividend yield, and its share price tends to be uncorrelated with that of other Vietnamese stocks. In our view, the company is inefficiently priced by the market and its current valuation does not reflect the strong earnings growth we expect over the next six to 18 months.
We added to our existing holding in Vietnam Dairy Products. We believe this consumer staples company will see earnings growth inflecting positively in the next 12 months, while the valuation remains at highly attractive levels.
We initiated a small position in FPT Digital Retail. The electronics retailer has been launching a very successful pharmacy chain, and we think it will be one of the winners in this space. The company currently has around 800 stores (with plans to have 3,000 by 2026), and we believe that by 2024 its pharmacy could make up more than half of sales.
We increased the size of our position in Khang Dien House. The real estate developer caters to Vietnam's growing middle and upper classes. We believe this is a high-quality developer with good corporate governance. The sector has recently significantly underperformed the market, and we took the opportunity to narrow the extent of our underweight positioning.
We booked some profits in Saigon Beer Alcohol Beverage (Sabeco). Our investment thesis, namely that the company is taking market share from rival Heineken, is playing out, and this remains a high-conviction name. However, the relative valuation is less attractive following the recent strong share price performance.
We took profits in TRG Pakistan, trimming our holding on valuation grounds. Having become oversold earlier this year, the stock undertook a reverse rally in the third quarter, and we believe there is limited upside from here in the near term. We still retain an off-benchmark position as we believe that the company provides exposure to areas that are likely to benefit from increasing outsourcing, such as artificial intelligence customer-focused support functions, digital marketing, and customer care businesses.
We further trimmed our holding in Safaricom, the leading mobile operator in Kenya. We still have a high conviction in the name; however, we have concerns about the fragile macro environment and capital controls in Kenya and Ethiopia.
We closed the underweight to regional bank Ahli United Bank, in Bahrain, in the lead-up to its merger with Kuwait Finance House. The date for the finalization of the merger was set for October 2, at which point the position would be eliminated.
We increased the size of our position in Aluminium Bahrain (Alba), one of the world's largest aluminum smelters outside of China. In our view, this is a good asset that is materially undervalued. We believe that the commodity has the potential to surprise on the upside and that there is a good risk/reward trade-off here. A potential cross-listing in Saudi Arabia is likely to serve as a catalyst to close the valuation gap to regional peers.

30-Sep-2022 - Johannes Loefstrand, Portfolio Manager,

Shares in fintech group Kaspi fell sharply early in the third quarter, largely due to growing risk aversion at a global level. We felt that sentiment toward the name had become too pessimistic and took the opportunity to add meaningfully to our position. The shares subsequently recovered, producing a very strong return for the quarter as a whole.
Halyk Savings Bank of Kazakhstan was another contributor to relative performance, with investors encouraged by robust strong quarterly results and significantly increased 2022 guidance. Our recent meeting with the bank confirmed our investment thesis: The bank has a high, sustainable return on equity, and given its new dividend payout policy of 50?100% of net income, we believe there is a relatively high chance that dividends will be reinstated in the second half of 2022 and beyond, as the outlook for the full year becomes more visible.
In particular, our holding in Hightech Payment Systems worked in our favor. The global payments software company is Morocco-based but has strong market shares in several African markets and a growing presence in Asia and Europe. Investors were greatly encouraged by an upbeat trading statement, which highlighted a strong increase in recurring revenues and a confirmed upward trend for payment activity.
Venture capital company TRG Pakistan was a significant relative contributor. Its shares rose strongly over the review period on the back of expectations of dividends and share buybacks as well as a depreciating rupee.
Systems was another source of strength over the quarter. Shares in the information technology (IT) services company surged on robust corporate results, driven by high growth in both topline growth and profits.
Shares in our off-benchmark position in jewelry producer and retailer Phu Nhuan Jewelry fell sharply following strong share price performance earlier in the year and despite delivering a solid trading update that highlighted "impressive" growth in the first eight months of 2022.
Similarly, our holding in Mobile World Investment (also known as MWG) hindered the portfolio's performance as investors reacted negatively as it was caught up in the broader sell-off. We believe that in the longer term, MWG's new food retail stores are well-placed to continue taking market share from traditional wet markets on a national scale, whilst it is on the cusp of generating profits after years of heavy investments in store roll-outs and distribution centers.
Shares of Converge Information and Communication Technology Solutions fell sharply, hindering portfolio performance. Sentiment toward the Philippines-based broadband service provider was dented by worse-than-expected quarterly results and lowered guidance for both revenue growth and its residential subscriber base target. Longer term, we believe Converge has the potential to be a market share gainer in a two-player telecommunications market, while the penetration of fixed broadband in the Philippines is one of the lowest in the region and the competitive environment.
In the case of Australia-listed online marketplace Frontier Digital Ventures (FDV) the stock was caught in the broader small cap and tech sell-off. However, recent results are encouraging and are pointing to sharp inflection in profitability, while sales growth remain potent.

Risks

Typical Investor