Tundra’s Pakistan fund opens in Sweden mid-October

Trading in Swedish asset manager Tundra Capital’s Pakistan fund starts on 14 October with an eye to long term returns from what it sees as an emerging market offering significant potential once the current security situation changes.

Portfolio manager and partner at Tundra Capital Johan Elmquist (pictured) said Pakistan was an attractive market with a p/e of 6x, yielding 8.5%, and offering investors access to developed market standards in areas such as accounting.

“In many ways Pakistan is like a developed market, but from the security point of view it is a frontier market,” Elmquist said, noting that the Swedish Ministry for Foreign Affairs currently recommends that Swedes do not visit the country.

But Pakistan has shown promise in the past, for example in the 1990s before its first nuclear weapons test that resulted in sanctions against the country, and before 9/11 and the subsequent wave of terror. Pakistan has often been compared to its neighbour India. Today it trades at a discount of 60-70% to India because of the security situation, estimates Elmquist.

The fund has been a long time gestating, he said. The idea goes back to 2005, when colleague Mattias Martinsson, also portfolio manager and partner but then working at another asset manager, was screening for the cheapest stocks worldwide. The potential of Pakistan was further confirmed when attending investor conferences focused on emerging markets, Elmquist said. Martinsson visited Pakistan in 2008, when he was running a long/short emerging markets fund. The idea remained and came to fruition thereafter as Tundra’s own product.

The investable universe is some 640 companies across the market capitalisation spectrum. However, the fund has to offer daily trading. That in turn places a liquidity requirement on the portfolio which means it will have a focus on bigger companies. But Elmquist said some spice could be added to the portfolio through mid cap holdings.

“With current poor liquidity in the market we can still handle $50m with ease.”

One of the key sectors is banking. Pakistan’s four biggest banks are overcapitalized, with the biggest state controlled bank yielding 14%, Elmquist said. Other sectors of interest include fertilizer companies, textiles and consumer.

Oil and gas play an important role in the local exchange, where about 20% of the KSE index is accounted for by a single oil firm. This is more about downstream activities – refining – rather than upstream, because Pakistan imports an estimated 80% of its oil needs. “There is a lot of talk around the potential for offshore oil and gas, but it is difficult to determine how believable it is,” Elmquist said.

The challenge is the pressure these imports put on Pakistan’s balance of payments. It takes a lot of textile exports to import oil, Elmquist said. Remittances play an important role here. An estimated seven million Pakistanis live abroad, remitting about $10bn annually.

The fund’s distribution initially targets Swedish retail investors. It is Ucits III registered in Sweden, although obtaining regulatory approval for other European markets is simply a “technicality”.

Distribution will take place through platforms for the domestic market, such as Avanza and, it is expected, Nordnet. However, clinching deals have already been struck with mutual fund exchanges MFEX and Nasdaq/OMX. MFEX gives access to the likes of Carnegie, Danske Bank, Nordbanken and Handelsbanken. Nasdaq/OMX enables distribution via private banks such as Penser. Further deals with allocators are being negotiated before the launch date, Elmquist said.

The fund comes with a 2.5% management and zero performance fees. The minimum investment will be SEK6,000 (about €653). There are currently no other share classes offered.

Full details of the fund including relevant documentation translated into English for non-Swedish investors are yet to be published, but are expected imminently, Elmquist said. Tundra is also planning a series of investor information meetings in Stockholm during early October, according to the company’s Swedish website.

The website also reminds investors that they should have an investment horizon of 10 years for a market such as Pakistan.

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