Harvest Global Investments, which partnered BNP Paribas Securities Services to launch an Asia Frontier Equity Fund, is counting on surging consumption and demand for commodities and infrastructure in frontier markets to boost returns.
Andrew Tan, Harvest’s managing director and deputy CIO, says the $20m fund, launched late last year, attracted capital from institutional investors from China and Japan. The fund invests mostly in Mongolia and is also considering Sri Lanka, Bangladesh, Myanmar and Vietnam. It is allocating 60-80% for opportunities in industries related to consumption, 20-30% in commodities and 10% in infrastructure. “Theses are the three buckets of drivers.”
“This is new territory, the frontier markets. We are seeing a huge opportunity coming out from demographic dividend, where the whole population is young,” Tan says. “We have a total of 300 million new consumers, you can feel the heartbeat of consumption.” He admits frontier markets are highly inefficient, and is mitigating the risks by avoiding investments in banks, highly-regulated industries and real estate.
BNP Paribas Securities, acting on the mandate from Harvest, became the first global custodian to support foreign investments in the Asian frontier market. Lawrence Au, head of its Asian operations, says the securities services provider had to put together a new operating model for investing in Mongolia.
“Like all emerging markets or frontier markets, there are a lot of risks associated with investing in these markets,” Au says. “There’s no concept of a custodian in the market, they’ve never heard of it and that’s become a challenge.”
Using a trustee account opened at the Mongolian Securities Clearing House and Central Depository, Au says the bank’s structure ring-fences Harvest’s assets, thus protecting the underlying investors.
“Everything that we did, it was in unchartered waters. It is a market that no other people has gone into and we managed to put together a workable framework, not the most ideal, but it is able to help Harvest to invest in the market, ensuring the safety of the assets, ensuring that the risks involved are managed properly.”
Tan says liquidity isn’t the most ideal in the frontier markets. “Among all the frontier markets that we invest into, perhaps Mongolia has the least favourable liquidity environment. We do acknowledge that. That’s why it’s very important for us to have a high conviction in terms of the stocks that we like, and we feel that we have to be comfortable with gradually accumulating our position.”
The open attitude of the market in Mongolia also was a pleasant surprise to the investors, Au says. “They are very willing to listen and as a result of that process, we are unofficially advising them on how a proper market should work, what should be the infrastructure, what they need to look at when setting up a proper stock market and the associated intermediaries to facilitate international investors. They take it onboard very seriously.
Tan also wants to see more market competition into the frontier markets. “Ultimately that would help us and help our investors.”
“We’re looking forward to more and more people getting into these markets, that’s something that will be positive for us as well, in terms of fostering an investment culture for some of these frontier markets.” - Wing-Gar Cheng