Asia Frontier Fund USD A-shares gained +2.3% in April 2017. The fund outperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+1.3%), the MSCI Frontier Markets Net Total Return USD Index (+1.2%), and the MSCI World Net Total Return USD Index, which was up +1.5%. The USD A shares achieved a NAV of USD 1,780.72 which is a new all-time high (the previous high was in January 2017 at USD 1,757.74). The performance of the AFC Asia Frontier Fund A-shares since inception on 31^st March 2012 now stands at +78.1% versus the MSCI Frontier Markets Asia Net Total Return USD Index, which is up +42.0%, and the MSCI Frontier Markets Net Total Return USD Index (+34.3%) during the same time period. The fund’s annualized performance since inception is +12.0% p.a., while its YTD performance stands at +4.5%. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 9.01%, a Sharpe ratio of 1.32, 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.

This was a better month for the fund with a well-rounded performance led by Pakistan, where the fund’s consumer discretionary holdings did particularly well on the back of good quarterly results by the automobile and consumer appliance names that the fund holds. We continue to be positive on the consumer discretionary sector in Pakistan due to the underpenetrated consumer market in the country. Automobile sales continue to grow at double digits and the fund holds two passenger car companies, one motorcycle company, and one truck manufacturer, and additionally one consumer appliance company.

The bigger event this month in Pakistan was the decision by the Supreme Court not to disqualify the Prime Minister over the Panama Papers issue. The market had been weak due to this uncertainty but rallied by ~2,800 points (+6.0%) between 19^th April and 21^st April with the decision being announced on 20^th April. However, the issue has not died down yet as there will be a Joint Investigation Team probe into the matter, which is expected to be completed within 60 days.

With the election expected in May 2018 we would not be surprised by further political noise, but the growth outlook for Pakistan remains positive on the back of a pick-up in economic activity with most industries going through a capacity expansion cycle and this is reflected in the loan growth numbers over the past few quarters with double digit loan growth for fixed capital investments. Further, the China Pakistan Economic Corridor “CPEC” continues to be executed and the expected increase in power capacity can help improve GDP growth rates to greater than 5-5.5%. Consumer discretionary demand remains strong on the back of low interest rates and an improving security situation.

Though the Bangladeshi market corrected by 3% during the month over currency depreciation fears, the fund’s largest holding, the GDR of a Bangladeshi pharmaceutical company, was up by 20% during the month, thus helping the fund’s performance. Lower remittances and a slight current account deficit has led to currency depreciation of ~3% over the past two months. However, the macro situation in Bangladesh is still stable with foreign exchange reserves covering 9-10 months of imports.

The Sri Lankan market rallied by 9% this month on the back of low valuations as well as possibly some frontier funds rebalancing from Pakistan to other frontier markets as Pakistan moves to emerging market status by the end of May 2017 (though AFC Asia Frontier Fund will continue to invest in Pakistan after its inclusion in the MSCI Emerging Market Index). The fund has increased its exposure to Sri Lanka over the past month as written in last month’s comment as we saw value in some of the names. Within Sri Lanka, a conglomerate, a consumer beverage company, and a tobacco company all helped with performance during the month.

Mongolia continues to be a turnaround story and did well for the fund this month, with good gains from a cashmere producer and a coal producer. With the IMF’s backing, FDI picking up, coal exports increasing and currency appreciation, the macro situation in Mongolia seems to be turning around.

Vietnam had a negative month as the heavily-weighted banking sector saw a slight correction. Nevertheless, the story continues to be positive, as this was backed by the latest FDI commitments of USD 10.95 billion so far this year, a growth of 40% YoY.

The best performing indexes in the AAFF universe in April were Sri Lanka (+9.0%), Mongolia (+4.7%), and Pakistan (+2.4%). The poorest performing markets were Laos (-5.0%) and Cambodia (-4.3%). The top-performing portfolio stocks this month were a Mongolian fire equipment producer (+81.5%), a Pakistani car assembler (+39.4%), a Mongolian gold exploration company (+30.7%), and another Pakistani car assembler, which was up 28.4%.

In April, we added to existing positions in Laos, Mongolia, Sri Lanka, and Vietnam and reduced our exposure in Mongolian, Pakistani, and Vietnamese holdings and completely exited two Vietnamese companies: a food producing company and a property developer. We newly added a Pakistani petroleum marketing company, a bank in Sri Lanka, a Sri Lankan household good producer, a Cambodian port, and two new holdings in Vietnam: a producer of plastic bags and a property developer.

As of 30^th April 2017, the portfolio was invested in 116 companies, 1 fund and held 5.4% in cash. The two biggest stock positions were a pharmaceutical company in Bangladesh (9.2%) and a Pakistani pharmaceutical company (3.5%). The countries with the largest asset allocation include Pakistan (26.1%), Vietnam (24.7%), and Bangladesh (17.8%). The sectors with the largest allocation of assets are consumer goods (29.6%) and healthcare (18.2%). The estimated weighted average trailing portfolio P/E ratio (only companies with profit) was 19.8x, the estimated weighted average P/B ratio was 3.26x, and the estimated portfolio dividend yield was 3.51%.