east capital (lux) frontier markets fund · the frontier markets, with prices some 80 percent below...
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East Capital (Lux) Frontier Markets Fund
Important Information: Full information about East Capital’s funds, such as the prospectus, key investor information document (KIID) and other fund documents can be obtained free of charge from East Capital, from our local representatives and are available on East Capital’s website. Every effort has been made to ensure the accuracy of the information in this document, but it may be based on unaudited or unverified figures or sources. Investment in funds always involves risk. Past performance is no guarantee for future performance. Fund units may go up or down in value up and may be affected by changes in exchange rates. Investors may not get back the amount invested. The availability of East Capital’s funds may be limited or restricted in some countries. Detailed information about where the funds are registered and what types of distribution are permitted can be obtained at East Capital. The information about East Capital’s funds is only directed at those investors located where East Capital is authorized to make this information available, and is not intended for any use which would be contrary to local law or regulation. Prospective investors should inform themselves as to the legal requirements within their own jurisdictions for the purchase and holding of fund units; and the income and other tax consequences which may apply in their own jurisdictions relevant to the purchase, holding or disposal of shares. Suitable financial, tax and legal advisors should be consulted, as may be required.
Cover pageThe Jemaa el-Fnaa market in Marrakesh, Morocco
© East Capital, 2014 Photos: Luka Esenko, Roï Saade, Victor Brott, Snezana Vucetic Bohm and members of our staff.
East Capital is a specialist in emerging and frontier markets. The company, founded in 1997, bases its investment strategy on thorough knowledge of the markets, fundamental analysis and frequent company visits by its investment teams. Our staff represents 25 nationalities and provides an unprecedented knowledge base of the regions we invest in. East Capital actively manages EUR 2.9 billion in public equity, private equity and real estate. We have clients, ranging from direct retail investors to leading third party distributors and first tier institutions, from all over the world. East Capital is headquartered in Stockholm, with offices in Hong Kong, Luxembourg, Moscow, Oslo, Paris and Tallinn. www.eastcapital.com
Stockholm
Oslo
Paris
Tallinn
Hong Kong
Luxembourg Moscow
Dubai(opens in 2015)
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Frontier fascination
We believe frontier markets are the next generation of emerging markets. In our quest to find the best investments, we are now taking an increasingly global perspective by launching East Capital (Lux) Frontier Markets Fund, investing in frontier markets around the world.
The frontier universe comprises a variety of different countries spanning from frontier Asia through the Middle East and Africa to Europe and Latin America, providing a good diversification opportunity. Frontier markets account for 13% of the world’s population but only 4% of the world’s GDP, hence the current underrepresentation lends confidence to these markets’ continuing emergence and potential. Demographics is the key growth driver and the young populations in frontier markets will undoubtedly boost economic activity in the near future.
For nearly two decades East Capital has successfully identified and invested in many companies across emerging and frontier markets which were in an early stage of development. This period has taught us valuable lessons and has given us the expertise to spot the real long-term growth drivers, trends and investment opportunities. Currently we manage about USD 450m in frontier markets across asset classes in the Balkans, the Baltics, Central Asia and Asia and we are now leveraging our regional expertise into a combined global frontier strategy.
Our recent visits to places like Saudi Arabia, Vietnam and Nigeria, only confirm the positive growth trend for global frontier markets highlighted by macro economists and investors. With this publication we want to share our findings and our conviction to invest into frontier markets.
Truth be told, the world is constantly changing and we at East Capital are excited about taking an active part in this transformation.
Peter Elam HåkanssonCIO, Chairman & Founding Partner
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Frontier markets can best be described as the next genera-tion of emerging markets. The term is relatively new and was first coined in 1992 by the International Finance Corporation to describe markets that are smaller and less accessible than traditional emerging markets, but still investable.
However, there is no universally accepted definition of what constitutes a frontier market. Index providers tend to look at three main factors; economic development, market size including liquidity and openness to foreign investment. Inves-tors, who have a limited reach and capacity, often tend to end up adopting strategies linked to an index. Our approach is to not constrain ourselves to an index, but rather to let ourselves be guided by the markets offering the most attractive opportunities, driven by long-term sustainable trends, that in the future are likely to move these markets up to the next level. Our approach and our proven track record in emerging and frontier markets allow us to spot exactly those opportunities.
We see a very exciting universe spanning from Argentina in Latin America through the oil-rich countries of the Middle East and the African continent, to the new Asian tigers of Pakistan, Vietnam, Bangladesh and Sri Lanka. It also includes frontier Europe, such as the Balkans and the Baltics, and
Central Asia, where East Capital has invested for more than 15 years. It is a diverse universe and includes economies at different stages of development with varying opportunities and challenges. The equity markets tend to be small, but the countries and the opportunities tend to be large. Take for example Nigeria, considered to be a frontier market, with a current population of more than 170 million people which, in 50 years’ time, is expected to have outgrown the combined populations of the 28 member states of the European Union.
Extended frontiers universe
Included in MSCI Frontier Markets Index
East Capital extended frontiers
Frontier markets — the next generation of emerging markets
“ Our approach is to not constrain ourselves to an index, but rather to let ourselves be guided by the markets offering the most attractive opportunities.”
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Teens Twenties Thirties Forties
Several factors underpin the case to invest into frontier markets. An expected strong and sustainable growth trend, attractive valuations, a good diversification opportunity and a currently low AUM level that is set to grow, make frontier markets a very attractive asset class.
Sustainable growthEconomic growth of frontier markets has overall been impres-sive and the outlook remains strong. For years ahead frontier markets are expected to grow faster than both emerging and developed markets. Favourable demographics with young and growing populations and the rise of a new middle class are key drivers for growth, and important factors to increase share prices and market capitalisation.
Favourable demographicsIn a large number of countries of the frontier world, the me-dian age ranges from the late teens to early twenties. Recent trends highlighted by the United Nations suggest that this part of the world will not only have a large but also better trained work force in the decades ahead.
For example in Pakistan and Bangladesh, more than half of the population is below 25 years old. With the 6th and the 8th largest populations in the world, consumption and economic growth can be expected for many years to come.
The working age population coming on stream in Africa, the Middle East and Asia is significant. According to the United Nations, the top 10 countries in the frontier universe, in a sample of more than 60 countries, will see the fastest work force growth from 2015 to 2020. They span from Saudi Arabia with an 11% increase in working age population to Rwanda with a 21% rise.
World median age by country
Youngest• Niger (15.1)• Uganda (15.2)• Mali (16.0)
Oldest • Japan (46.1)• Germany (46.1)• Italy (44.5)
Source: CIA World Factbook
Why invest in frontier markets?
Expected GDP growth
0%
1%
2%
3%
4%
5%
6%
7%
8%
2014e 2015—2020 2021—2030 2031—2040 2041—2050
Frontier Emerging Developed
Source: Citi Research
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Rising education levelsLiteracy rates are also on the rise and today fewer countries than ever have situations where primary and secondary schooling is not available. Secondary school rate in Sub-Saharan Africa has increased from 9% in 1975 to around 30% in 2005, and in the process foreign direct investments have taken off. These positive indicators across frontier markets will also generate confidence towards the sustainability of ris-ing incomes and GDP per capita levels in the coming years.
Growing and increasingly educated populations also create opportunities for companies to outsource production from previous centres such as China where unit labour cost has risen in the last years. Global fashion retailers are increas-ingly sourcing from frontier countries such as Bangladesh and Vietnam and have recently ventured into Ethiopia.
Demand for infrastructure and new technologyGrowing populations and economies create a vast demand for infrastructure and major investments are going into this area, e.g. benefiting providers of basic materials. All over the frontier world, cement producers are experiencing a buoyant demand as millions of people from Asia to the Middle East and Africa use it to build new houses. Although the infra-structure deficit is still significant, technological innovation enables these countries to leapfrog traditional infrastructure. Mobile banking, which is spreading fast in the frontiers, is one example of this and shows that these countries are in fact at the forefront and even ahead of the developed world in some areas. For instance, the world’s leading mobile banking system M-Pesa (M for mobile, pesa for money) takes Kenyans a step forward by facilitating day-to-day cashless money trans-fers. In Kenya today, more than 30% of the GDP is transacted through the mobile phone.
Increasing prosperity and a new middle classAs the frontier universe integrates with the global economy, prosperity is increasing and a new middle class has started to emerge. Frontier markets are therefore gaining attention from leading multinationals and private equity companies that are investing heavily across the consumer, financials, communica-tions and infrastructure space for the long-term. Economies are also becoming more diverse and less dependent on com-modities, though they still play a key role in many countries.
In Saudi Arabia for example, economic growth is now driven by non-oil sector, meaning that young Saudi consumers are carrying retail sales up to new records.
Attractive valuationsFrontier markets are attractively priced, with 9x price-to-earnings (P/E) valuations on average while developed markets are priced at 15x earnings and emerging markets at 11x.
Frontier markets present certain challenges in that they are
less developed, often smaller and corporate governance standards are not always fully established. The risks associ-ated with this are fairly compensated by current valuations, particularly when considering the strength and longevity of the underlying drivers of growth. Frontier markets have the lowest price-to-earnings valuation compared to emerging and developed markets, despite higher earnings growth and yield. The Serbian stock market is one of the cheapest among the frontier markets, with prices some 80 percent below its pre-crisis peak.
Sound diversificationOn a country-by-country basis, frontier markets are with-out doubt riskier than most of the developed and emerging markets. However, a portfolio that is made up of frontier markets gives a different picture. Frontier markets are only weakly correlated with each other and with the rest of the world. This is mainly because frontier markets are geographi-cally spread out and have more diversified trade links as a universe, and are less integrated into the global financial system. As a result, the MSCI Frontier Markets Index shows a lower volatility compared to emerging and developed market equivalents, and has also delivered better returns over the last years.
Market valuations
P/E 2015E EPS Growth 2015E Yield 2015EDeveloped 14.7x 9.9% 2.7%Emerging 10.7x 12.0% 3.2%
Frontier 8.9x 15.9% 4.7%MSCI indices, Bloomberg, as of 10 November, 2014
Frontier
Emerging
Developed
0%
5%
10%
15%
20%
25%
0% 5% 10% 15% 20%
Return
Volatility
Source: MSCI indices, Bloomberg, 31 December, 2011 – 31 October, 2014
Annualised USD return and volatility since end of 2011
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Low AUM level set to growFrontier markets still have a very small share in global fund allocations. Total assets under management invested in fron-tier markets equities is only about USD 22bn, or merely 1.8% of the total assets under management in emerging market equities. This picture is now changing. Frontier markets are emerging as high investor interest helps improve transpar-ency and liquidity, creating the right environment for further investments. For instance, it is now only a matter of time before Saudi Arabia will allow direct foreign ownership while Tanzania removed restrictions on foreign investors in Septem-ber 2014.
Total assets under management (USDbn) in frontier and emerging market equities
1,200bn
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20
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400
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800
1,000
1,200
1,400
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05Ju
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06Ju
l-06
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07Ju
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08Ju
l-08
Jan-
09Ju
l-09
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10Ju
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11Ju
l-11
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14Ju
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Emerging markets Frontier markets
22bn
Source: Credit Suisse
“ While emerging markets have become more researched, the frontiers still require first hand information and face to face meetings for well informed decisions.”
Peter Elam Håkansson and Emre Akcakmak during a company visit in Beirut, Lebanon
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Our investment approach
Our investment team has been investing in frontier markets for 17 years. Our investment approach has always been based on stock-picking, in-depth research and long-term strategies. We work on the ground and make frequent company visits across our investment universe to find the best investment opportuni-ties. The benefit of being on the ground is particularly impor-tant in frontier markets that are less developed and that tend to be overlooked and underinvested. One indicator of this, for instance, is that there are on average only eight analysts per company in the MSCI Frontier Index while the same number for the MSCI Emerging Market Index is 22. The difference should be even larger if one also includes off-index companies which tend to have no coverage at all in frontier markets. In ad-dition to being on the ground, our dedicated corporate govern-ance function and in-house trading team strengthen the team’s ability to navigate markets characterised by, at times, patchy governance standards and thin trading volumes.
To get the best growth exposure in frontier markets we focus on the domestic consumer by investing in sectors such as food, retailing, healthcare, financials and telecoms. Companies in these sectors in emerging markets have delivered strong re-turns and we expect the same to happen in the frontier world. We recognise the potential in natural resources but are careful in investing in sectors that are exposed to the goodwill of local governments and global commodity prices.
The “new frontiers” East Capital approaches the frontier market space by tak-ing a wider view on the investable universe than what any benchmark provides. We pride ourselves of being respectful, insightful explorers and our aim is to trek beyond the estab-lished universe into the next frontiers early on. This means going to countries as diverse as Saudi Arabia in the Middle East, Rwanda in Africa and Cambodia in Asia. A wider view provides the strategy with a more diversified portfolio of interesting opportunities at a lower risk compared to a strategy closer to the index. The main reasons for this are first, that benchmarks are highly concentrated (i.e. three countries make up roughly 50%) and second, that the correlation between these markets (especially the off-benchmark countries) are fairly low.
Furthermore, we think that large companies in the index are not necessarily the most interesting ones and hence using a wider investment universe will provide us with a better expo-sure to frontier growth opportunities.
In short, we like young and fast-growing markets, the emerg-ing middle class, balanced risk, sustainable cash flows and the “new frontiers”.
East Capital in Dar es-Salaam, harbour of peace and economic hub of Tanzania. With a population growth rate of about 7 percent per year, Dar is one of the fastest-growing cities in Africa.
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East Capital (Lux) Frontier Markets Fund
The investment objective of East Capital (Lux) Frontier Markets Fund is to provide long-term capital growth through exposure to companies located in frontier markets through-out the world. There will be particular focus on young and growing markets in order to gain exposure to the emerging middle class and domestic consumption.
In order to combine strong growth with attractive valuations, the fund seeks investments in a wide spectrum of countries, sectors and companies. It aims at investing a significant share in off-index countries, the “new frontiers”, to capture oppor-tunities in markets that have not yet been classified but shows positive economic development.
The fund employs a fundamentally research-driven, long-term and local investment approach.
Fund termsName East Capital (Lux) Frontier Markets Fund
Investment focus Frontier markets equity
Benchmark MSCI Frontier Markets Index
Type UCITS
Domicile Luxembourg
Launch date 15 December 2014
NAV valuation Daily (ex. Fridays)
Dividend policy Accumulation
Management fee 2% (Class A); 1.25% (Class P)
Performance fee 20% over benchmark (Class P), Claw-back
Minimum investment 200 EUR/USD, 2 000 SEK (Class A)2 000 000 EUR/USD (Class P)
Reporting Monthly factsheet and manager commen-tary; tailor-made reports and conference calls upon request from institutional clients.
Underlying fundamentals
• Strong and sustainable growth outlook• Favourable demographics• Attractive valuations now• Good diversification element
Investment strategy
• Focus on young and growing markets in order to gain exposure to the emerging middle class• An unconstrained investment style allows for wider investment universe and selected oppor-
tunities in the “new frontiers”• Bottom-up stock-picking through fundamentally research-driven, long-term and local invest-
ment approach• Valuation discipline imperative to deliver consistent risk-adjusted returns
Portfolio characteristics
• Initial portfolio of approximately 60 stocks• Typical stock position size range: 1% to 5% (min 0.5%, max 10%)• Portfolio concentration: Top 10 ≈ 30%, Top 20 ≈ 50%
Fund objective
• Achieve long-term capital appreciation and to outperform the benchmark and competitors over a market cycle
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Andreas NabsethAnalyst, based in Stockholm
Frontier Africa1 year at East Capital8 years in Industry
• Swedish national, joined East Capital in 2014.• Master of Science in Finance from Stockholm
School of Economics, including studies at University of St. Gallen in Switzerland.
• 6 years’ experience in frontier markets invest-ments, primarily across the African continent. Currently covering Africa. Previously Andreas worked with corporate finance for Lehman Brothers in London and as an Investment Man-ager at Swedfund International.
Marcus SvedbergChief economist, based in Geneva
7 years at East Capital15 years in Industry
• Swedish national, joined East Capital in 2007.• Bachelor of Arts in Political Science from Stock-
holm University and a Master of Science in Economics & Political Science from the London School of Economics.
• Marcus has studied, analysed and traveled to frontier markets in Europe throughout his career. Prior to East Capital, Marcus worked at the Stockholm Institute of Transition Eco-nomics (SITE), where he was Acting Director. Marcus also gained relevant experience from working at the Swedish Trade Council as pro-ject manager for an industry group focusing on emerging markets.
Louise HedbergHead of Corporate Governance, based in Stockholm
7 years at East Capital7 years in Industry
• Swedish national, joined East Capital in 2007.• Master of Science in Accounting and Finance
from the Stockholm School of Economics and has completed studies in Sustainable Develop-ment and Sustainable Enterprising at the Stock-holm Resilience Centre at Stockholm University.
• Louise holds a specialist role in the investment team focusing on Environmental, Social and Governance issues (ESG) across East Capital’s investment region. Previously, Louise worked as Head of IR and Communications at East Capital Explorer AB, as IR Manager at Dometic Group and as a Financial Communications Consultant at JKL Group.
Emre Akcakmak, CFA Portfolio Manager, based in Stockholm
Frontier Middle East8 years at East Capital8 years in Industry
• Turkish national, joined East Capital in 2006.• Master of Science in Finance from Stockholm
School of Economics and Bachelor of Arts in Business Administration from Bosphorus University in Istanbul.
• Responsible for selected investments in the Frontier Middle East since 2006. Currently covering Middle Eastern emerging and frontier markets as well as Turkey. Prior to East Capital, Emre worked at the financial audit department of Deloitte & Touche and at the research depart-ment of Yatirim Finansman Securities in Turkey.
Tim Umberger, CFA Senior Advisor, based in Moscow
Frontier Europe and Frontier Americas7 years at East Capital9 years in Industry
• Slovenian national, joined East Capital in 2008.• Master of Science in Finance from Ljubljana
University.• Tim has been involved in frontier markets from
the very beginning of his career. He started to cover and invest in the Balkan markets in 2004 and has since been part of several large transac-tions in the region. Previously, Tim worked as Equity Analyst at KD Group, a Slovenian asset management company, covering Eastern European equity markets.
Adrian Pop, CFA Senior Advisor, based in Hong Kong
Frontier Asia9 years at East Capital12 years in Industry
• Romanian national, joined East Capital in 2005.• Master of Science in Business Administration
from Vienna Economic University and Master of Science in Finance from Stockholm School of Economics.
• Covered the Southeast Frontier European markets for 8 years, prior to moving to Hong Kong. Currently, covering Asian emerging and frontier markets. Previously, Adrian worked as a consultant for Accenture in Bucharest cover-ing the telecommunications sector.
Peter Elam HåkanssonCIO, Chairman & Founding Partner, based in Stockholm
17 years at East Capital31 years in Industry
• Swedish national, founded East Capital in 1997.• Heads the Investment team. Peter devised, set up and implemented East Capital’s investment philosophy and strategy.• Peter has been one of the pioneer investors in emerging and frontier markets. Prior to East Capital, Peter held a series of senior positions at Enskilda
Securities in London, Paris and Stockholm – where his last role was as Head of Equities in Stockholm and Global Head of Research.
The frontier markets investment team is headed by Chairman and CIO Peter Elam Håkansson, who is responsible for the overall management and for over-seeing the team’s work. He is supported by highly experienced senior advisors, portfolio managers and analysts as well a chief economist and head of corporate governance.
Frontier markets investment team
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Contact us
Headquarters, StockholmKungsgatan 33Box 1364111 93 Stockholm, SwedenTel: + 46 8 505 88 555 (for distributors and institutions)Tel: +46 8 505 97 777 (for private clients)E-mail: [email protected]
Hong Kong office9F Wyndham Place40-44 Wyndham Street, Central Hong KongHead of office: Michael Hanson-LawsonTel: +852 2669 6200E-mail: [email protected]
Luxembourg office11 rue Sainte-Zithe L-2763 LuxembourgHead of office: Paul CarrTel: +352 20 882 191E-mail: [email protected]
Moscow officeRomanov Dvor Business Centre4 Romanov Lane125009 Moscow, RussiaHead of office: Jacob GrapengiesserTel: +7 495 380 15 00E-mail: [email protected]
Oslo officeKronprinsesse Märthas PlassPB 1811 Vika, Oslo, NorwayHead of office: Erik HaukaaTel: +47 22 39 66 90E-mail: [email protected]
Paris office21 rue Auber75009 Paris, FranceHead of office: Olle OlssonTel: +33 1 40 73 00 80E-mail: [email protected]
Tallinn officeCity Plaza building, Tartu str. 210145 Tallinn, EstoniaHead of office: Gert TiivasTel: +372 6406 650E-mail: [email protected]
