Photographer: Hoang Dinh Nam/AFP via Getty Images

Frontier Fund Wins With Vietnamese Dairy, Pakistani Cement Bets

  • Dubai-based Duet's frontier fund reports 9% annualized returns
  • Duet favors consumer, power companies in developing nations

While investors dumped trillions of dollars in emerging-market assets in the past three years, a Dubai-based frontier fund went looking for stocks to buy in even more exotic destinations: Pakistan, Vietnam, Saudi Arabia and Egypt.

The strategy has worked well for Duet Mena Ltd., a manager of private-equity and hedge funds. The firm’s Duet EM Frontier Fund has reported annualized returns of 8.9 percent since its inception in January 2013 through the end of March. The benchmark MSCI Frontier Emerging Markets Index posted yearly losses of 2 percent during the period.

Hedi Ben Mlouka

Source: Hedi Ben Mlouka

Hedi Ben Mlouka, chief executive officer Duet Mena, is looking for companies that are benefiting from internal growth in frontier economies while avoiding industries that are too dependent on the global commodities cycle and overseas demand. That means betting on the changing lifestyles of consumers in the developing world, where growing affluence is helping create markets for specialized retailers as well as education and health care service providers.

“Anything where we think the revenue derived by the companies are driven by exports or growth of more developed markets or bigger emerging markets, typically we will stay away,” Ben Mlouka said in an interview. “You can’t be isolated 100 percent,” he added. “But generally the main driver is internal and structural by nature.”

Pakistan, Vietnam

Duet Group, the London-based parent firm, manages more than $5.6 billion in equities, $1.2 billion of which is in frontier-related portfolios under Duet Mena. Ben Mlouka, a 37-year-old alumnus of BNP Paribas SA and Merrill Lynch, joined Duet in 2008 to start the frontier investment unit in Dubai.

His $270 million Duet EM Frontier Fund makes long-term investments in publicly-traded equities in frontier markets and smaller emerging markets as classified by the index provider MSCI Inc.

Ben Mlouka’s investments include independent energy producers Nishat Powers in Pakistan and Vietnam’s PetroVietnam Nhon Trach 2 Power JSC. Such companies are well positioned because the demand for power is rapidly increasing in these countries, where it takes at least 4-5 years to build new supply, Ben Mlouka said.

Saudi Lunches

He recently bought more shares of Pakistan’s Lucky Cement Ltd. and Maple Leaf Cement Factory, on the belief that a $45 billion economic corridor between China and Pakistan will lead to greater infrastructure spending. The fund also maintains large positions in Vietnam Dairy Products and Pakistani pharmaceutical manufacturer Searle Co.

Saudi Arabian retail had been a “fantastic growth story” for the fund. For example, a bet on fast food operator Herfy Food Services Co. performed well as “work habits in Saudi change with the time allocated for lunch reduced, getting toward more developed-market standards,” Ben Mlouka said.

“Fast foods are doing better and becoming entrenched in the lifestyle in many of the countries where we are investing,” he added.

At the end of last year, Duet reduced its exposure to Saudi Arabia to 5 percent of the portfolio from 22 percent on concern that the governments’ spending cuts will hurt local consumers’ purchasing power. While that helped, Duet still saw its return to investors fall to 6.5 percent in January, the fund’s worst monthly performance since its founding.

Egypt Exposure

“Almost all of the trades that worked over the last couple of years didn’t work this year,” said Ben Mlouka, referring to the volatility in global markets at the start of 2016 amid concern about the drop in oil and a slowdown in China. “To stay in very good performance this quarter you had to shift completely your portfolio.”

As part of that makeover he boosted his exposure to Egyptian equities to 18 percent from 4 percent after the devaluation of the country’s currency, seeing the move as the start of a normalization of its foreign capital repatriation timeline.

Last month, Duet recovered from its January losses, reporting a 6.7 percent net return. The hedge fund industry on aggregate achieved an average 2.3 percent return in March, with emerging market-focused firms performing better at 7.5 percent, according to eVestment.

Ben Mlouka is encouraged by political developments in countries such as Saudi Arabia, the United Arab Emirates and Argentina, where policy makers are opening up their capital markets to foreign investors and reforming the economies.

“There is an interesting pattern we are seeing in frontier markets, which are headed in the right direction, toward liberalization and privatization,” he said. “There is a realization there that you can’t continue to run these countries the way they have been.”

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