Crisis Talk — with Thomas Hugger, CEO of Asia Frontier Capital
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Crisis Talk — with Thomas Hugger, CEO of Asia Frontier Capital


Thomas Hugger has more than two decades of investment experience in frontier markets. Volatility is part of the job description. But he has never faced challenges like those unleashed by the Covid-19 pandemic.

Hugger founded Hong Kong-based Asia Frontier Capital, a fund manager focused on investing in high growth Asian frontier economies, in 2013. Its funds include the AFC Asia Frontier Fund, AFC Iraq Fund, AFZ Uzbekistan Fund and the AFC Vietnam Fund.

Hugger, still chief executive officer of Asia Frontier Capital, talks to GlobalCapital Asia about the unique opportunities and obstacles he has seen in 2020 — and how he is positioning the fund for the future.

GlobalCapital: How have you and the fund navigated the pandemic this year?

Thomas Hugger, Asia Frontier Capital: We were following the news very closely from the beginning, when the first cases started to emerge in Wuhan. We had to plan things in such a way that the people in the front, who are managing our funds, are spread out so if something goes wrong in one country, we are able to replace each other. I was in Thailand, Ruchir [Desai, fund manager] was in Singapore and then he went to Mumbai when the situation got worse in Singapore. Our Vietnam fund manager stayed in Vietnam, and the chief investment officer of our Iraq fund was in Iraq. We were supposed to have our second investor tour for our Uzbekistan fund in May; luckily the CIO for Uzbekistan had been there since mid-January to prepare for the event.

For our Hong Kong office, we had little guideline and direction from the SFC about what to do, as we are just a small company, but we kept the office partly open in the end with just one person coming in.

From an investment point of view, we didn’t expect the dramatic happenings in March and April when whole countries started to close down. We thought there would be more localised events. Looking back, we should have been more aggressive earlier in the year in terms of selling more of our investments. But frontier markets act quite differently from emerging and developed markets.

Our fund hit its high in 2016, when we got a lot of inflow, but since then the developed market indices have gone up — but the frontier market indices have been down during the same period. For instance, our fund’s valuation was around 17 times P/E in 2016, but it is now at 7.6 times P/E.

What have you done differently because of the pandemic?

In March, when the coronavirus took off, we had some urgent redemptions from our fund by distressed sellers. But since then, the markets have rebounded. Our Iraq fund is up 27% since its low, and Vietnam is up around 20%. But despite that, foreign investors are still pulling out of frontier markets — perhaps not as aggressively as at the end of February and in March, but they are putting money into developed markets. Foreign investors are still net sellers in almost all frontier equity markets in Asia.

When the crisis hit our markets, our fund was trading at eight times P/E, so in our view there was not too much downside compared with the US or other developed markets, which were trading at nearly 20 times P/E. The crisis hit those markets more than most Asian frontier markets. But we also have some frontier stocks that are not listed in the local markets, such as the Bangladeshi pharmaceuticals company Beximco Pharmaceuticals, which is a blue chip company that has GDRs listed in London. Beximco is one of the top holdings of our AFC Asia Frontier Fund. Its stock price dropped significantly in March, but fortunately started to rebound in April thanks to the news that the company was the first producer globally of the generic version of the Covid-19 treatment drug Remdesivir. The stock price is now up 20% since the beginning of the year.

The pandemic has completely changed the business outlook and business case negatively for a lot of sectors, including airlines, airports, duty free shops and retailers. Therefore, we have had to make some changes as well. The only related exposure we had was Airports Corporation of Vietnam (ACV), which operates most of the airports in the country. It was a big theme in Asia because of increased tourism from China to all these airport operators, which got quite a hefty valuation.

Normally we are a value investor. But in this case, we were a little bit out of our comfort zone. When we invested, ACV was trading at higher valuations and it looked like the P/E wouldn’t come down in the near future. But when the pandemic hit, we had to take a stand. We didn’t sell immediately. The stock price did collapse because there were no buyers at that time. But when the market rebounded, the stock gained again nicely and then we sold into strength.

We also had a significant stake in a duty free shop operator in Mongolia which runs each shop at the airport in Ulaanbaatar, at the Trans-Siberian Railway station in Ulaanbaatar and at the Russia-Mongolia road border. That was also affected since all air and land borders were closed back in January. The market is quite illiquid, but we were lucky to get an interest from a private equity firm. We ended up selling our stake, so we were quite happy to get this exit opportunity.

What returns have your funds made this year so far and how are you bracing yourself for the future?

The AFC Asia Frontier Fund is down 8% so far this year, Vietnam Fund is down 8.7%, Iraq Fund is down 5.5%, and Uzbekistan Fund is down 5%.

We are avoiding tourism stocks at the moment. Our Iraq fund didn’t have a lot of oil stocks before, but we might start increasing our exposure. We look at sectors which are benefiting and which are suffering and make our call. We will, of course, invest again in the tourism sector when the outlook gets better, but we haven’t pulled the trigger on it yet.

What will be the biggest investment roadblocks in the short and longer term?

That’s the million dollar question, because it all comes down to when countries will open up again to foreign travellers, and when a vaccine is available. The second theme that will also be key is the US presidential election, and whether Donald Trump is re-elected — because if the Democrats win, there will be a dramatic change in many policies.

What has also been difficult for us is meeting new investors. We haven’t been able to meet investors physically and raise new funds in the past seven to eight months, which has been very difficult. Investors are increasingly reluctant to meet in person, which could be challenging going forward.

On the investment side, we made a good call about two months ago, when we took a position in a Sri Lankan latex gloves maker. It trades at a valuation of 8.1 times P/E and a price to book ratio of 0.8 times. It pays a 2.7% dividend, so it compares very favourably to one of the largest glove makers in the world, Malaysia’s Top Glove, which trades at 100 times P/E and a price to book of about 14 times. The Sri Lankan company is much cheaper and up 32% since we bought it — and it’s a stock we found ourselves, since no brokerage company is following it.

What have been the key lessons and takeaways from the Covid-19 crisis?

Fortunately, we got some things right. Frontier markets are generally illiquid. In the case of a market crash, even huge markets such as London and New York get illiquid during a crisis and certain stocks’ prices just crash. Our funds are generally very well diversified; we don’t have a big overweight position. Our philosophy is: because we are investing in illiquid markets, we are diversified. And I think this is a good lesson for when a pandemic hits or crisis hits. Diversification is very important.

What we also experienced was that some stock markets in our region were closed for extended periods. That was the case with Bangladesh, Sri Lanka, Iraq, and Jordan, which was quite dramatic. It was just sheer luck that we didn’t have any redemption requests at the time. That would have been a major problem as we would have had to suspend our fund dealings. So it’s good to prepare for those events with some cash buffer.

Our funds also have a notice period for any redemptions. That was helpful when a lot of investors wanted to redeem in March. With the notice periods, we had ample time to raise money. Fortunately, we didn’t have to sell into the weakness. And even when the markets were down 10% to 15%, I could sleep well because we were prepared and we had cash set aside for any redemptions. We saw between 0% and 5% redemptions for our different funds. But investors came back in small amounts in June and July. That’s in part because frontier countries have handled the pandemic better than a lot of developed markets.

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