Fund Focus: Asian Frontier Capital Offers U.S. Investors Access To Untapped Markets
Mar 2 2015 | 6:47am ET
By Hallam Dixon -- Asian Frontier Capital (AFC), a Hong-Kong based asset manager specialising in Asian frontier markets, is making a capital raising push in the United States.
AFC was established in 2013 by Thomas Hugger after a management buyout from Leopard Capital, where he was formerly managing partner, COO and CFO. Since the buyout, AFC has been moving from strength to strength and its flagship AFC Asia Frontier Fund was in the top 20 best performing hedge funds in the world in 2014, according to alternative assets data and intelligence provider Preqin. The fund is available in USD, CHF, and EUR. In 2014, the fund returned 23.24% net in USD terms, marking an outperformance of the MSCI Frontier Markets Asia Index which returned 6.6%.
The majority of AFC’s capital is strategically allocated to Vietnam, Pakistan, Sri Lanka and Bangladesh, but it has diversified further into investments in markets as far off the beaten track as the Maldives, Mongolia and Papua New Guinea. Leveraging local, on the ground knowledge to invest in these niche markets “is where the firm really differentiates itself to have a competitive edge,” explains CEO Thomas Hugger. Hugger has been growing his local networks for decades and earlier in his career founded a brokerage company in Bangladesh which has grown to become one of the top three players in the market.
Hugger outlined the factors that made investments in these regions attractive. Firstly, he noted the low correlation: since launch, the fund has had a correlation to the MSCI World Index and MSCI Emerging Market Index of just 0.27 in 2013 and 0.24 in 2014. Beyond this, Hugger emphasised the upside potential of these economies due to low valuations and high GDP growth stemming from favourable demographics, manufacturing shifts from China, and increasing domestic consumption.
Another advantage, according to Hugger, of the structured investment process is the lack of research and coverage in these frequently inefficient markets where the vast majority of trading is done by domestic, retail investors who have a strong history of speculation. In Bangladesh, for example, only around 2% of daily market volume is made up by foreign investors so when picking up stocks that are attractively priced they are likely to be bought from domestic traders who may not be willing to hold good companies for a longer term time horizon when there are negative external factors causing market noise.
As Asian frontier markets are a long term growth story, the firm’s typical holding period is from two to five years, and although the companies are listed, sometimes low liquidity in smaller positions means that investments can offer the risk return profile of a private equity position. To mitigate downside risks, the fund has diversified its holdings across 11 countries and holds approximately 120 stocks, with none comprising more than 5% of the fund.
Political risk, corporate governance risk and currency risk for individual markets can be quite high compared with more developed economies such as in the U.S. or in Europe, so the emphasis on diversification is a core tenant of the investment strategy. This approach is one of the key reasons why the correlation of the fund with global markets and other asset classes is so low as political and company specific risks across these markets remain largely independent of each other. That is to say, for example, that the outcome of an election in Bangladesh has little impact on the political risk in Vietnam and even less to do with the profitability and valuation of a foreign listed company serving a different domestic economy.
As the firm expands, it has begun to add country-specific funds to offer dedicated exposure to investors. In December 2013 it launched the AFC Vietnam Fund which went on to become the best performing Vietnam fund in the world in 2014. The fund returned 32.5% over 2014 (in USD and net of fees), outperforming the Ho Chi Minh VN Index which rose by 8.1%. Though the AFC Vietnam Fund is not open to U.S. investors at this stage other opportunities will present themselves to those based in America who are looking for unique investments with the firm busily preparing the AFC Iaq Fund which will be launched at the end of April 2015.
The AFC Asia Frontier Fund offers investors access to the whole host of Asian frontier markets and has monthly redemptions and the option of a notification period of either three or six months depending on share class. For investors looking to have the shorter notification period Class A shares have a management fee is 1.8% with a performance fee of 10% (with high watermark and hurdle). Investors looking to invest in these markets for the longer term are also able to elect for Class B shares where, in exchange for the longer notification period, investors receive a discount with a management fee at 1.5% and a performance fee of 8% (with high watermark and hurdle). The fund is audited by Ernst & Young and as of March 2015 will have a three year performance track record. Protocol Capital Management, led by David Rhudy and Alan Glatt, is the placement agent.