How to Invest in Frontier Markets

Investing in frontier markets is a challenge due to lack of liquidity and significant set-up times. One way to circumvent these problems is to Invest in other people’s expertise through a managed fund.

We work hard to associate ourselves with smart individuals where we can reciprocate value. This not only gives us opportunities to put capital to work, but provides us the ability to grow a powerful network filled with influential people.

One such person I have become friendly with is Thomas Hugger, COO & CFO of Leopard Capital, a frontier markets private equity fund we have discussed previously in these pages.

Thomas has had a global career, spending 27 years in private banking, where he specialized in managing portfolios of listed and unlisted equity investments. Further, he is a CFIA. His most recent venture is the formation of the Leopard Asia Frontier Fund (LAFF), a liquid investment vehicle focusing on Asia’s frontier markets.

I recently caught up with Thomas in Phnom Penh where we had a discussion about his fund, as well as some opportunities he sees right now in the countries LAFF is active in. Enjoy!


Scott: Thomas, you started the Leopard Asia Frontier Fund, under the umbrella of Leopard Capital last year, at the end of March. Why did you decide to start this fund? What opportunities captivated you? And, how’s the performance been thus far?

Thomas: We have been marketing our PE funds since 2007 and have met with more than 1,000 potential investors over the last 5 years. Many of them told us that they liked the growth story of Asian frontier markets, but would prefer to invest in a more liquid product. That was one of the main reasons for launching the Leopard Asia Frontier Fund.

We strongly believe in the growth potential of all of the countries we invest in because they have young and growing populations, and rapidly-expanding GDPs – resulting in higher GDP per capita and disposable income for these countries in the future.

The performance of the MSCI Frontier Market Asia Index has lagged the performance of developed countries which is a kind of conundrum. However, this provides investors in 2013 an even better opportunity since they can invest in Asian frontier markets at a lower P/E ratio compared to developed markets, despite considerable current and future economic growth.

We believe that it is just a matter of time until investors rediscover emerging and frontier markets and allocate more capital to them.

Scott: Your mandate is fairly broad, allowing you to invest in any Asian frontier market, from Mongolia to Laos, Bangladesh and even Iraq. Of course that doesn’t mean that you are finding value in all those places. What does your current asset allocation look like?

Thomas: There is definitely a lot of value to be found in Asian frontier markets. Currently, the countries with the largest allocations are Vietnam (19.5%) and Sri Lanka (16.8%). In both countries, I have found stocks which are trading at unbelievably low valuations.

I was able to invest in breweries in Vietnam which are trading at P/E multiples between 4 to 6x, and at or below book value. At the same time, Heineken is prepared to pay 36x P/E and 10.5 times book value for Singapore-based Asia Pacific Breweries (APB) in order to get a bigger foothold in ASEAN countries. Another example is a leading car distributor in Sri Lanka, in which I was able to invest at below 2x P/E and below book value.

Laos makes up 10% of LAFF and even though its exchange only has two listed stocks, they are both still trading at attractive valuations despite the recent price rally. I have also invested in five stocks with significant exposure to Myanmar (Burma). Four of these five stocks are not trading at attractive historical valuations, but due to the opening of Myanmar to foreign investors, these companies are very attractive in our view.

Scott: What sectors, in general, do you tend to lean toward when making investments in frontier markets?

Thomas: We especially like consumer and consumer-related stocks due to the underlying GDP growth and the emerging middle class – these factors will contribute to an increase in consumer spending. It is simply a repeat of growth stories we have seen in Thailand, China, and India. We also like stocks focusing on infrastructure, banks, and financial services. Additionally, each country in LAFF’s universe has its own unique key sector, such as tourism in Sri Lanka and Cambodia.

Scott: We beat the drum of “boots on the ground” here at Capitalist Exploits constantly. You can’t really understand a place without spending time with local business owners, entrepreneurs and even the political decision makers.

I can say that I’ve never seen a passport like Douglas Clayton’s. You guys log a LOT of kilometers every year. Can you give us an idea what your due diligence process consists of once you touch down in a place?

Thomas: It’s a short answer, really…we try to meet as many people as possible from many different sectors and business communities in order to understand the country’s opportunities and challenges.

Scott: With such a diverse number of frontier markets in Asia and places like Pakistan performing well, while Bangladesh and Vietnam have done the opposite, which country are you most excited about at present?

Thomas: I am very excited about the immense opportunities Myanmar presents. We at Leopard Capital believe the opening of the country will be a game changer not only for Myanmar but also for the whole Mekong region (Cambodia, Laos, Thailand and Vietnam) and also for Bangladesh.

I currently also like Vietnam because of the extremely low valuation of mid and small cap stocks there, and the fact that almost all foreign investors would prefer to stay away from the country because they lost so much there in 2008.

Scott: Leopard having operations in Cambodia I want to direct this question to Indo-China. The capital markets of Laos and Cambodia are very young with a combined total of three listings. From your experience, how will these exchanges evolve? Do you see institutional funds and liquidity flowing into these exchanges in the near future? What’s your 5 year prognostication?

Thomas: One of the most important next steps in both countries is the arrival of custodian banks in order to provide their services to institutional foreign investors. I believe that there are attractive IPO candidates in Laos and Cambodia which will provide good opportunities for both local and foreign investors.

I would love to see Naga Corp., which is currently listed in Hong Kong, have a dual listing in Cambodia. I expect that there will be two to three IPO’s in 2013 in both Cambodia and Laos and that there will be about 20 companies listed in five years in both markets.

Scott: You mention Vietnam, a country that has been battered by both stubborn inflation and a property bubble. It’s a fascinating country with fabulous resources, including its young, hard-working and literate population. Do you see any catalysts on the horizon that could signal a floor in the market? When should we look to jump back into this market?

Thomas: I like Vietnam exactly for the reasons I stated earlier and for what you said. I think it is a classical case of “contrarian investing”: invest in a market when nobody likes it. I think we hit this point in the second half of last year with the problems surrounding Sacom Bank and the arrest of the CEO of Asia Commercial Bank.

There are still problems with the property market and the bad loans within the Vietnamese banking system, but this provides a great opportunity for long term investors to pick up mis-priced stocks, especially within the consumer, utilities, and agriculture sectors.

Scott: How about Laos. Many peg it to be one of the fastest-growing economies in the region..?

Thomas: Laos should benefit from more trade and investment activity within the Mekong region, and also with China. The country has a very young population (average age is 19). Laos is particularly interesting for power production and agricultural investment. However, it is still a communist country and may move a bit slower than its neighbors.

Scott: Investing in so many markets means you likely see a number of compelling opportunities. Can you give our readers one or two?

Thomas: Consumer, consumer! We like the consumer sector due to these countries’ young populations and high GDP growth.

Scott: Frontier markets tend to under-perform when the overall global economic environment suffers, as it did in 2008. Even in 2012, frontier markets as an asset class did not perform well. Do you see this changing in 2013, or are we destined for another year of the same? And, is it possible that some areas will outperform regardless?

Thomas: I see 2012 as a year of transition for frontier markets. Frontier markets are particularly driven by capital flows from foreign investors. In 2012, international investors bought stocks in the US and Europe, since it seems that America’s economy and property market have both found a bottom and the European currency crisis has been resolved for the moment.

In 2012, investors overlooked emerging and frontier markets and I believe that 2013 will be much better.

Scott: Chris and Mark keep hammering the point of seeking out and working with competent exceptional management, finding it more important than most other factors when evaluating an investment. This seems even more important when working in Frontier Markets, can you provide us with some insight into your own philosophy in this respect?

Thomas: I fully agree with them that it is important that the management is outstanding, trustworthy, and most importantly, creating value for the shareholder. I have seen instances where the management’s interests were not aligned with that of the shareholders, especially from companies in state-directed economies.

Scott: Thomas, thank you for taking the time to share your thoughts. Any final gems you can share with readers who are just getting their feet wet, so to speak, in frontier markets.

Thomas: I believe that investors in frontier markets should invest in an “actively” managed fund and not in a passive investment like an ETF. The reason is that if something goes wrong in frontier markets, it can have severe consequences (i.e. Vietnam in 2008 which lost 66% in local currency). At Leopard Capital for example we try to detect these events early and make exits in our fund at the appropriate time in order to preserve the investor’s capital.

Scott: Thanks again Thomas… I’m looking forward to spending more time with you here in Phnom Penh, and hopefully seeing you at our Meet Up in April.

Thomas: Thanks Scott.


Thomas hit on some key points to investing in frontier markets, namely:

  • Taking an active role, or investing in an actively managed vehicle
  • Invest only in strong and trustworthy management
  • Be a contrarian; invest in a market when nobody likes it!
  • Invest where valuations don’t reflect the growth

For those of you who are interested in learning more about the Leopard Asia Frontier’s Fund you can visit Leopard’s website. For a personal introduction to Thomas, just drop us a note.

If you want to experience SE Asia for yourself then you need to come to our Cambodia: Boots on the Ground Meet Up, April 24-26 in Phnom Penh. Our keynote speaker, Dr. Marc Faber will take us through why he loves SE Asia and how to invest. We’ll also hear from local fund operators, including Leopard. You’ll get a personal tour of the Cambodian Stock Exchange, and hear from prominent local businessmen, attorneys and real estate developers.

It’s a one-of-a-kind event, limited to 35 attendees. Reserve your spot before February 24 and get a 20% early bird discount. Click Here, or the banner at the top of the page for more information.

– Scott

“East Asia has prospered since the end of the Vietnam War, and Northeast Asia has prospered since the end of the Korean War in a way that seems unimaginable when you think of the history of the first half of the century.” – William Kirby


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