Annual General Meeting

[00:00:12.16] Good afternoon, everyone. Good to see people both here in person and those who will be watching at a later date. It is, as the chair said, good to be back here in person in our normal room for this AGM. And there will be some familiar aspects of the presentation that we're about to deliver because, as always, the message which we're giving is a somewhat repeated one.

[00:00:38.00] We've had the same message for the last 12 years. We've had the same investment managers for the last 12 years. And we continue to invest in the same way in a range of really exciting countries.

[00:00:51.17] And it's worthwhile before we kick off with the sort of statement that was up last year as well. We invest and provide capital to a portfolio of companies that serve the needs of three billion of the world's poorest people and in a world where sometimes large portions of the globe get ignored by investors. Where so many people are removed from global capital markets, I think it's really important that there are opportunities for investors, be they in the UK or elsewhere to invest in a portfolio that focuses exclusively on this part of the world that is so often ignored by others.

[00:01:31.43] If we think about Frontier Markets-- and again, this should be familiar to people. It's not all going to be the same as last year's presentation, I tell you. They continue to be underowned and underrepresented.

[00:01:42.65] 30% of the world's population, 10% of the world's GDP, but a negligible amount of the world indices-- thank MSCI for that. So the vast majority of people have almost no exposure to this 30% of the world's population. People may talk about thinking-- and maybe people may talk about thinking about the poor. People may talk about that they really want to invest and help and aid the development of the world, but very, very few people do so.

[00:02:11.36] There are long-term structural opportunities in these markets. And remarkably, something we've highlighted before, these markets are very diverse and offer significant yield. And we'll come onto a few slides about that a little later on.

[00:02:28.31] Just a look over the last three years, the three very troubled years of COVID in the world, and we've sort of divided sort of four lines you can see in front of you. The index-- it's our reference benchmark. And I describe it as orange-y red, for lack of a better description, yellow being the fairly well known MSCI Emerging Markets, green being the Frontier Markets, and the pink line being the FTSE. And you can kind of see the bottom three of all delivered roughly the same performance over those three years of about minus 10%, whereas index has done slightly better, but still not done that well.

[00:03:07.88] As I remind people-- and the board are all too well aware-- Emily, has worked alongside me for 15 years, has never experienced a bull market. We don't do bull markets here. We do survival.

[00:03:23.42] As a reminder-- again, as a reminder, these markets continue to be growing faster than the rest of the world. And they come at pretty cheap price to earnings ratios and price to book ratios, depending on how you look at it. Either a 40% discount-- or we'll have to go 60% up roughly to trade at the world multiple in terms of earnings. And we'd have to double the trade at the world price to book ratio, so enormous upside if the markets, which we invest in which have significant growth were to move towards more global norms in terms of valuation.

[00:04:03.74] In terms of yield-- and it's going to be roughly the last penultimate slide before I hand over to Emily, again, a slide we've shown before. We don't focus on dividends. This is not an Income trust. But it's been a very clear feature of this fund and continues to be that the stocks we invest in generate lots of cash flow.

[00:04:24.36] And because no one is giving these companies capital, they have to respect shareholders. And therefore, generally, their capital allocation decisions are better than they would be in some of the bigger emerging markets where people are throwing money at them. And therefore, they don't have to care about shareholders.

[00:04:40.38] So our companies continue to generate significant amounts of income that we pay out. And that continues to be a pretty attractive feature of the trust. As it says there, current yield of just over 4%.

[00:04:53.93] And so if we just think about the totality of our universe, we offer growth in a world that is starved of growth and increasingly starved of growth. We may have had a brief pickup in growth post-COVID, but it's not sustainable in many places. We offer yield in a world that has a bit of yield now, but not that much as we're sort of seeing in our markets.

[00:05:15.51] We offer extremely cheap valuations. And we offer remarkably low volatility because even though each of our markets volatile, whether that's Kazakhstan, or Indonesia, or Saudi Arabia, when you put them together, a point we've made many times before, they are not that volatile. And they continue to be less volatile when put together than many global indices. That's what our markets offer.

[00:05:38.97] In terms of what we offer, it is active, active management. This is not about tracking an index. We offer hard currency returns. We do not care if we make great returns in Kwacha, or Naira, or Hryvnia, or any other Frontier Market currency.

[00:05:53.55] We care about dollar returns. That's what we focus on for our investors. We care about liquidity management. As we've stressed here many times before, we do not invest in pre-IPO situations, marked and make believe assets, or anything else. All our stocks trade every single day.

[00:06:10.87] And if anyone at Bloomberg in front-- anyone with a degree of mathematical skill and a calculator could value our portfolio in about 20 seconds. And we also continue to stress our discount management. This is not an Evergreen fund. There's a five year life on this trust.

[00:06:28.50] And we've done this in 2016. We've done this in 2021. And we will do this again in 2026. All investors will be able to exit at NAV less cost in a methodology to be determined by the board closer to the date.

[00:06:43.95] So that helps keep our discount narrow. And if we're not doing a good job, then we probably don't deserve your capital. And that's the reality of investing. We've said many of these points before. So for some new and more exciting points, over to Emily.

[00:07:01.93] So you can see here where the trust was currently invested at the end of December. And we'll come on a little bit to show some of the changes that we've done over the past year. But to talk about, perhaps, some of the bigger countries where we're currently invested, it's obviously been a really good year for Saudi Arabia.

[00:07:19.93] And I'm sure you're familiar with the country. It's a very big oil exporter. So it has benefited from that rise in oil price we saw over 2021 and 2022.

[00:07:31.81] But particularly here, the sort of companies that we're invested in is much more focused on-- or through '22. It's much been much more focused on financials, focused on retailers. And that's because, really, this is one part of the world that didn't suffer from the cost of living crisis.

[00:07:48.88] Given the huge oil exports, the country as a whole had very substantial resources to be able to support its domestic population. And so what we have seen there, really, over the last five years is a huge amount of social change. Probably, the country of all that we are invested in that's seen the most social change over the life of this trust so as sight a longer period.

[00:08:13.00] But that has really resulted in some interesting opportunities in the banks and the financial sector. For example, penetration of mortgages is now not very high. But it's substantially higher than it was in Saudi Arabia.

[00:08:27.08] So it is now possible to get a mortgage in a way that I think 10 years ago would have been something that people only dreamed of. And so that's been trends that change in sort of social change. Change in retail environment is been something that we've been very much invested in through 2022.

[00:08:43.90] And just to touch, perhaps, on a couple of other countries, if we were to take Indonesia-- and that is a country where you can see the weightings come up quite substantially. And really, what we have been looking at there is a commodity exporter. Obviously, they did quite well again through '22.

[00:08:59.62] But what we are looking at is much more specific. Indonesia, particularly, is currently I think the world's second largest exporter of nickel and could potentially become the world's largest exporter of nickel. Nickel's used in EV cars.

[00:09:12.07] And particularly, in Indonesia, they've had a policy to bring beneficiary of nickel, so to make it into batteries, bring that increasingly onshore, and then using some of the excess energy production that they have there to do so. That has huge implications on their current account balances, on their currency, and will really filter down to meaning that more of that battery production is used to benefit the people of Indonesia. So again, we actually invested in retail companies, in banks in Indonesia, but looking to take advantage of the increased production of batteries-- it's not yet batteries. It will become batteries-- onshore in Indonesia and how that's benefiting the Indonesian people.

[00:09:55.03] And a pick out, perhaps, some of the other examples on there, you can see a number of countries in Eastern Europe. And they've probably come up a bit over the year, so Hungary, Poland, Greece. And in some of those countries, what we are invested in as at the end of December is more forward looking into 2023.

[00:10:15.64] So 2022 has obviously been a really difficult year as in the UK, but even more magnified in Eastern Europe because of energy prices being very high. And then at the Delta, they've seen it is even higher than we've seen here. So inflation in Hungary has been above 20% and I think the highest they've seen in our investing lifetimes. Similarly, Poland's seeing very, very high inflation.

[00:10:39.94] As we go into 2023 and some of those effects moderate, we think we can find some opportunities there. So those are countries that have had a much more difficult 2022 and will benefit going into 2023. If we move on to some of our sector exposure-- I'm going to move through a couple of these fairly quickly because I think there's some more interesting slides coming up.

[00:11:01.30] But you can see a fairly diversified pie in terms of sector exposure. The one large sector is financials. And to just comment on that, you will have heard from what I said previously about the countries is that where we're looking to play some of those retail trends where we see the country doing really well. Sometimes we're doing that through financials, perhaps, because it's what's most readily available in those markets, perhaps, just to capture on those specific country domestic effects.

[00:11:27.40] So here, I think it's not really worth thinking about it as an aggregated sector. This is really driven by those country's specific trends from the previous slide. Here's some of the largest companies where we're currently invested.

[00:11:41.16] And to maybe pull out and describe them a little bit-- so for example, Genting Malaysia-- there's actually a casino operator in Malaysia, casino and theme park operator. So Malaysia was actually a country which opened much later post-COVID. So they didn't really fully open the economy until last summer.

[00:12:00.51] And then they've seen a ramp up in the casino operations, in the theme park, and their hotel operations through the second half of 2022. And they're just reaching the point where we expect in the first quarter or second quarter of 2023 that they will be fully operating. So you can see some of the trends that we've seen in Western markets playing out, but just taking a little bit longer, perhaps, to play out.

[00:12:24.51] And so describe, perhaps, a couple of other companies on this slide. So if you look down the bottom, FPT is a Vietnamese software company. And they do software and technology outsourcing, so in some ways similar to a very mini emphasis or TCS that you may have heard about from emerging markets.

[00:12:47.54] There we go. If we move on to-- I'll do a couple of these slides. I'll jump back to you. If we move on to some of these slides, then you can see, perhaps, more interestingly some of the trends of where the trust has moved over the course of the past year.

[00:13:00.36] So you can see up at the top of the country positions some of what I was mentioning with Eastern European countries, such as Hungary, Kazakhstan rising up that chart. And that has come at the expense of other countries that have done well through this year, such as Greece. So some shuffle around, perhaps, of the exposure there.

[00:13:21.71] You can see, again, Indonesia is a country where we've really added to positions through the year there and somewhere like Chile as well, which again, had a really tough COVID and a really tough pre-COVID period with some of the political unrest that they've seen there where we're starting to find some very interesting valuations in some of the smaller cap stocks there, which were very excessively sold off with some of the pension fund outflows that we saw there.

[00:13:45.72] So quite a shuffle around as you can see between countries that are moving towards the top and countries moving down within that pie. You can see also probably unsurprisingly the energy is a sector where we're much more invested now than we were at the beginning of 2021-- sorry-- the end of 2021. But actually, even within that, it may be interesting to know that one of the stocks we've added to most is in the uranium sector rather than being a natural energy plane and so really benefiting from some of the renewable trends that are taking place probably as aggressively in some of these markets as we're seeing within the West.

[00:14:25.31] On here, you can see some of the sector-- sorry-- the individual stock names. And you can see that there's some really big changes between stocks that have moved to the top and stocks that moved to the bottom. And I think there's too many stocks to go through these in any detail.

[00:14:40.38] But I think it's really important then to go back to the sort of vehicle that we are. And we really think an investment trust is the right vehicle for Frontier Markets. And we think that because it means that we don't have the flows.

[00:14:52.10] And not having the flows means that we are able to have within our top 10 the companies that we think will do best over the next year rather than the companies that we think-- rather than needing to hold positions purely in order to generate liquidity for the fund.

[00:15:08.39] And that does change quite substantially from year to year in terms of where we-- the particular companies where we would like to be invested. Emerging markets-- emerging and frontier markets, particularly, these smaller frontier markets remain very volatile. And so it's really important that we have that flexibility to be able to move the portfolio from year to year. And we do really enjoy being able to take advantage of that flexibility. So I'll flip back to you, Sam.

[00:15:36.60] Yeah, so I mean, that's a really, really important point and something we've highlighted before. We are not forced to be in any single country. Five years ago, we probably had close to 50% of the fund between Nigeria, Turkey, Sri Lanka, Bangladesh. And today, we have next to zero in those countries.

[00:15:57.61] And that's not a view on the long-term outlook for those countries. We would anticipate and hope that over the next few years, we'll have meaningful exposure to those countries once again. But for various political macroeconomic, and indeed, stock specific reasons, in each of those cases, we felt a requirement to sell those positions. And we are out of those countries almost completely.

[00:16:18.34] I would fully expect that in five years' time, the big countries that we have today, whether it's Saudi, or Indonesia, or Thailand, or Kazakhstan, they may well be smaller because one cannot take a view that these countries are going to offer you endless blue sky opportunities. Those people who live by themes and dreams in frontier markets, and indeed, in emerging markets often live to regret it will has to be realistic about the actuality of the situation on the ground. These are great countries with bright futures ahead of them. But those bright futures do not come in nice linear-- nice linear ways.

[00:16:57.58] And everyone has to be really slightly skeptical about the promises one hears. In terms of performance, we've had a decent start to 2023, obviously. I think, until a day ago. We were up about 7%. And that's sort of 3% or 4% ahead of the reference index and roughly in line with emerging markets.

[00:17:21.82] Last year, as you can see, we were behind our benchmark slightly. Mainly that was in Q1. Eastern European exposure there was impacted by Ukraine development. And so it's good to see that we sort of recovered that loss to where we are today.

[00:17:39.82] But it's important to highlight we are not there to track an index. It's there for reference for our shareholders and for the board. But it is not our focus.

[00:17:48.04] Our focus continues to be finding alpha in these great countries, finding opportunities where no one else is looking, and a strong belief that after 15 bear market years, we won't just have to generate alpha. We may actually have a bit of beta to support our returns going forward. Thank you very much.