Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
Initially, the fund will focus on Pakistan, Vietnam, Kazakhstan, Sri Lanka and Bangladesh. JF plans to invest in these markets directly through their respective local bourses, American depositary receipts, global depositary receipts on foreign stock exchanges or participatory notes.
In the future, the fund may also invest in other emerging markets in Asia such as Cambodia, Kyrgyztan, Laos and Nepal when their markets become more accessible.
Terry Pan, JFÆs head of retail business in Hong Kong, says the company believes these are niche markets with strong growth potential in Asia. He expects this fund to attract investors who would otherwise hesitate to invest in such markets because of the costs involved or the difficulty in accessing them.
Pan notes, however, that investors should be aware that less liquid markets such as those this fund will be investing in tend to have higher risk premiums. ôThe fund best suits investors who are less risk averse and more willing to take a longer-term investment horizon.ö
He notes that the fundÆs managers will stick with relatively liquid stocks in Pakistan and Vietnam, as well as Kzakh stocks listed in London for now. The fund will be co-managed by Mayur Nallamala, Rajendra Nair and David Smith, who are all based in Hong Kong.
The fundÆs higher risk premium is reflected in its fee structure. In addition to the usual 5% initial charge and annual management fee of 1.5%, the fund will charge a performance fee of 15% and an administration fee of up to 3% for investors who redeem or switch before December 2010.
In contrast, the JF China Pioneer A-share Fund doesnÆt have a performance fee or administration charge, but it has a redemption fee of 0.5%.
Among the four markets the fund will initially be focusing on, Pakistan is the most liquid with an average daily turnover of $350 million.
JF isnÆt worried that the ongoing political instability in Pakistan, which has led to the declaration of martial law and the suspension of the constitution, will be a deterrent for the fund in the long-run. Despite political concerns that have persisted in Pakistan, its benchmark Karachi Stock Exchange 100 Index is up 165% over the past three years, outperforming the MSCI Emerging Market Asia IndexÆs 125% rise over the same period.
Pakistan is also trading at a relatively attractive price/earnings ratio of around 13 times forecast earnings for 2007 compared with around 17 times for Asia-Pacific ex-Japan.
JF favours the banking sector in Pakistan, which is in the latter stages of privatisation that started in 1991. Many commercial banks there have healthy balance sheets, an enhanced product range, good risk management and are arguably more advanced and liberalised than their Indian peers, JF says.
Muslim Commercial Bank (MCB) is among JFÆs top picks in Pakistan because of its attractive structural credit growth, broad deposit base, well-regarded brand, high profitability and strong management team. MCBÆs credit penetration is very low at 25% of GDP in Pakistan, while consumer lending accounts for 14% of the total loan book and only 4% of GDP, JF says.
ôMCBÆs growth potential is huge and more attractive than many Indian banksö, where credit penetration is at 47% of GDP and consumer lending accounts for 13% of GDP, JF says. JF also favours infrastructure, utility, and natural resources stocks in Pakistan.
JF sees Vietnam as a mini-China and notes that the next decade could be the ôgolden ageö for manufacturing in that market, given the substantial supply of low-cost workers as was the case in the mainland in the 1990s. VietnamÆs economy is expected to grow between 8-8.5% this year, trailing closely behind ChinaÆs expansion.
ôThe workforce is reasonably well-educated with a 93% literacy rate,ö says JF, noting that an increasing number of multinational firms up are setting up operations there.
JF believes the upcoming privatisations of more than 20 state-owned enterprises over the next three years, including four major state banks, will add further momentum to VietnamÆs stock market. JF notes that Vietcombank, the largest state-owned bank in Vietnam, is expected to be among the first of the lot to list before year-end.
VietnamÆs stock market has been among the best performers in Asia in recent years. Last year the market's main index rose 144% and the total market capitalization of companies listed on the exchange soared 10-fold to $15 billion. So far this year, the market is up around 34% so far this year and market capitalization is around $20 billion.
Natural resources are KazakhstanÆs biggest advantages, JF says. Its main export is oil, but it also has large deposits of coal, chrome, lead, copper, zinc, to name a few. In Sri Lanka and Bangladesh, infrastructure spending is expected to be a major investment theme.
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