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Aberdeen Frontier Markets held back by Pakistan holdings

Aberdeen Frontier Markets - No closet-tracker

Aberdeen Frontier Markets held back by Pakistan holdings – Aberdeen Frontier Markets (AFMC) has reported its annual report for the year ended 30 June 2018.

In his statement, the chairman noted that absolute and relative performance was disappointing during the year.  The company’s NAV per share and share price total returns in US dollars were -10.3% and -12.0%, respectively. This performance compared to a gain of 1.7% for the reference benchmark, the MSCI Frontier Markets Index on the same basis.


The managers pick companies in which to invest, rather than matching the structure and make up of the reference benchmark. Macroeconomic factors came into play in the second half of the year after a positive outlook and start in 2017, supported by the strength of the US economy. Towards the end of the period, volatility in global and emerging equity markets made a comeback.  The increased strength of the US dollar and worries over trade tensions between the US and China were key factors in this. However, the company says that anything seen as risky and in the firing line of a trade war and the dollar, particularly emerging and frontier markets sold off towards the end of the report period, compounded by weakness in many frontier market currencies. The investment managers point in particular to the Argentinian Peso, which fell by 42.5% against the dollar during the reporting period, with the bulk of losses occurring in May and June.

Absolute and relative performance was hindered by four factors:

  1. the portfolio’s exposure to Pakistan, which left the benchmark last year and suffered a falling equity market
  1. the overweight to Sri Lanka, whose market declined as a result of a poor harvest, fiscal austerity and a rise in the tax burden
  1. the exposure to Vietnam via off-benchmark names, which lagged the liquidity-fuelled rally of the MSCI Vietnam index due to foreign-ownership restrictions as noted above
  1. the company’s underweight to Kuwait, which made gains as a result of the stronger oil price and news that the market is under review by MSCI with a view to upgrading to emerging markets status

On a more positive note, the company’s significant underweight to Argentina was a benefit, but was not big enough to compensate fully for the four detractors to performance mentioned above.

Outlook – from the investment managers

“As we said in the interim report earlier this year, we believe corporate earnings in Frontier Africa are enjoying a cyclical recovery. In Frontier Asia, where the Company now has significant exposure, we expect another excellent year for corporate earnings in Vietnam, and continued solid results from our companies in Bangladesh, Pakistan and Sri Lanka. Pakistan and Sri Lanka have entered deep value territory and represent an opportunity, albeit macroeconomic challenges may linger some while longer. Turning to Argentina, the IMF package and reform programme agreed in June underpins an optimistic stance for the country in 2019 and we may look to raise exposure to the country on what are now, we believe, more palatable valuations.

For us, the outlook for frontier markets provides plenty of cause for optimism. Operational results from our investee companies, together with conversations on the ground, indicate that the corporate earnings recovery is set to continue. While volatility across various markets and some currencies have undermined the positives we are seeing in the short term, we expect these positive fundamentals to reflect in performance in the not too distant future.

The management style of the portfolio is benchmark aware but importantly not benchmark driven. In this respect we look across a wide array of countries with frontier market characteristics, including outside of the index, seeking out quality companies to invest in. This diversified portfolio of companies is managed with a mind to delivering strong performance over the medium to longer term at a low level of volatility. That said, there will be divergences away from the benchmark, as well as in relative performance. We remain committed to our investment approach, which entails rigorous interaction and engagement with companies. This allows us to identify those with solid long-term prospects and progressive management teams that will negotiate cycles and safeguard shareholder interests.”

Tender offer

In March 2017, Aberdeen Frontier Markets adopted a discount control policy whereby should the average ordinary share price discount to the underlying ex income NAV over the three month period immediately prior to the company’s year-end (30 June) exceed 10% then, at the discretion of the board, the company would implement a tender offer.

Over the relevant period the average ordinary share price discount to the underlying ex income NAV was 10.47%.

Having triggered the discount target, the board are asking shareholders to approve the tender offer for up to 15% of the issued share capital of the company (excluding Ordinary Shares held in treasury) at a tender price equal to 98% of the prevailing NAV (less the direct costs, including any realisation costs of underlying investments, of implementing the tender offer).

The Board believes that the tender offer, despite causing the company to shrink in net asset terms, strikes a fair balance between those shareholders who wish to realise part of their investment in the company at a value close to the NAV per ordinary share and those who wish to maintain their investment in the company.

AFMC : Aberdeen Frontier Markets held back by Pakistan holdings

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