THE FUND

The Fund rose 2.0% during the month, compared to the Fund’s benchmark index, MSCI FMxGCC Net TR (SEK), which fell 0.6% and MSCI EM Net TR (SEK), which rose 6.1%. The largest positive contributions were received from the Fund’s stock-picking in Pakistan and overweight in Sri Lanka. Negative contributions were received from the underweight in Lebanon and Morocco and also our stock selection in Nigeria. Among individual major holdings that contributed were the Fund’s holdings in the Pakistani IT company Systems, which rose 11% on a falling equity market. The Fund’s holdings in the Egyptian vehicle manufacturer GB Auto rose 21% and we got off to a good start in Indonesia where Media Nusantara rose 7%. Among our major holdings that contributed negatively during the month were three Vietnamese companies: IT company FPT which fell 6%, ice cream maker Kido Frozen Foods which fell 15%, and Masan Group which fell 15%. During the month, we sold our position in Sri Lankan ACL Cables after nearly an 80% rise from the bottom levels at the end of March. We slightly increased our positions in two of our Pakistani bank shares, Meezan Bank and Bank Alfalah, which we now believe have priced in lower interest rates in Pakistan. The policy rate in Pakistan has fallen from 13.25% at the beginning of the year to the current 7%. Both banks are examples of companies that offer something more than just traditional banking services. In Meezan’s case, it is about the company’s market-leading position in modern Islamic banking, which allows growth significantly higher than traditional banks. In Bank Alfalah’s case, we like the company’s more innovative profile, which lies at the forefront of the development of financial services in the country. We believe that the banking sector globally will face major challenges in the coming years with fierce competition. The individual banks’ positioning and adaptation to a more competitive environment, rather than valuations using historical assumptions will be crucial. The best banks in our universe will constitute a good proxy for the growth of the middle class in our markets, and valuations ​​are historically low. No new holdings were added during the month.

MARKET

MSCI FMxGCC Net TR (SEK) fell 0.6% in June, compared to MSCI EM Net TR (SEK) which rose 6.1%. The best markets during the month were Sri Lanka (+15%) followed by Kazakhstan (+6%). The worst markets were Nigeria and Vietnam, which fell 5% each. Among our non-index markets, we conclude that Pakistan fell 3%, Egypt remained unchanged, while Indonesia and Turkey each rose just over 6%. Since equity markets around the world turned upward towards the end of March, much focus has been on stimulus effects, with interest rate cuts being the primary “weapon” in our markets. Pakistan lowered the policy rate by another 100 points to 7% (compared with 13.25% at the beginning of March). The sharply lower demand locally has meant that inflation expectations have also come down, which has meant that bond yields in our markets have fallen. In Sri Lanka, for example, the 10-year bond yield fell from 9% to 7.2% during the month. Lower bond yields have in turn meant that local investors have moved some capital from the bond market to the equity market. Thus, despite continued sales from foreign investors, local investors are currently deciding the direction of the market. We believe this trend will continue as long as bond yields remain at these levels, despite uncertain profit prospects for the current year. The big question will be at what levels long-term interest rates stabilize, which of course depends on the recovery in the economies and the inflationary impact that will have. Given the shock of COVID-19, we believe central banks will be cautious about raising too soon and may accept low real interest rates (interest minus inflation) for some time to come. Regarding the ongoing pandemic, we note that, like the rest of the world, our countries are learning to live with COVID-19. Although deeply sympathizing with the many personal tragedies that are taking place around the world, we conclude that there are significantly more acute health risks for the populations in our countries today. We wrote a section on this in our recently published report: https://www.tundrafonder.se/wp-content/uploads/2020/05/Tundra-Annual-Sustainability-Report-2019-final.pdf

During June, MSCI announced upcoming index changes. The most significant announcement was that Iceland will be included in the MSCI Frontier Index from June 2021. Iceland will preliminary have a 5% weight and thus appears to become the fourth largest market in the index. For Tundra, which is investing thematically throughout frontier markets and emerging markets in early economic development, the index changes do not matter. Iceland with its 300,000 inhabitants and GDP/capita of USD 77,000 will not fit into our theme. We wrote a report almost exactly 3 years ago about the index problem in the frontier category and how Tundra handles the continuous changes. In the coming month we will release a new, slightly longer report where we develop that reasoning.

ESG Engagement

In total, two companies were divested in June due to financial considerations. These include a Pakistani bank, United Bank Limited, and a Sri Lankan company, ACL Cables.

No new company was added to the Fund this month.

DISCLAIMER: Capital invested in a fund may either increase or decrease in value and it is not certain that you be able to recover all of your investment. Historical return is no guarantee of future return. The state of the origin of the Fund is Sweden. This document may only be distributed in or from Switzerland to qualified investors within the meaning of Art. 10 Para. 3,3bis and 3ter CISA. The representative in Switzerland is OpenFunds Investment Services AG, Seefeldstrasse 35, 8008 Zurich, whilst the Paying Agent is Società Bancaria Ticinese SA, Piazza Collegiata 3, 6501 Bellinzona, Switzerland. The Basic documents of the fund as well as the annual report may be obtained free of charge at the registered office of the Swiss Representative..

Meeting senior management of Meezan Bank in Karachi November 2019.