Commodity companies extracting natural resources in Mongolia can offer huge opportunities to frontier investors look for contrarian calls, according to Thomas Hugger.
Citywire AAA-rated Hugger, who runs the AFC Asia Frontier (Non-US) fund, told Citywire Selector the country was his top anti-consensus play at present.
‘We think certain natural resources have bottomed out and are going up, so we have invested in two copper mining companies listed in Canada and Australia.
'Where they find copper they also have a little bit of gold, so we have invested in a small gold developing company, also listed in Canada. We bought it between $0.10 and $0.14 cents and it is now trading at $1.20,’ Hugger said.
Making the most of Mongolia
Mongolia is the fourth largest country allocation in the fund at 12.6% and here he holds Petromatad, a Mongolian oil company which returned 223.5% in April.
'There was speculation that a lot of the British companies going in there to invest equity in this company to finance further drilling of the potential huge untapped reserves in the ground. The stock has now corrected down unfortunately,’ Hugger said.
Hugger also thinks consumer stocks do well in Mongolia and has a small holding in the cashmere producer Gobi, which he said had shown resilience in tough times.
'It is a huge factory but they had a fire in their production facility. They were able to move most of the finished goods and the raw material aside so it didn't catch fire.
'Only a few of the machinery equipment was destroyed so the damage is not that bad. The best quality cashmere comes from Mongolia or Inner Mongolia in China, it is very expensive.’
Away from Mongolia, Hugger also has 3.6% of the fund invested in Iraq. Due to the lack of liquidity in the Iraqi equity market, this is held through a dedicated Iraq fund also managed by Asia Frontier Investments. It contains 12 stocks, the largest of which is Baghdad Soft Drinks.
‘After the two wars we consider Iraq as a post-conflict country. At the moment the whole country is at a standstill; it barely works. The state employees don't get paid on time.
'It is an economy starving of cash. If and when the ISIS insurgence disappears, the country settles and overseas investments finally come into the country, then it has huge potential.’
Over three years to the end of May 2017 the AFC Asia Frontier (Non-US) returned 37.41% in US dollar terms. This compares to a rise of 7.57% by its Citywire-assigned benchmark, the MSCI Frontier Markets Asia TR, over the same time frame.