Laurent Ettedgui manages Quam Asset Management's Mongolia fund, a fund that invests into what the company predicts will be the fastest growing economy in Asia over the next decade. The transformation of Mongolia has been driven by the imminent exploitation of huge, high-quality coal and copper deposits discovered near the demand centres of China, Korea and Japan, the firm explains.
Mongolia's growth may be represented by Norway or Qatar with a small population benefiting from global-sized resource deposits. The country has a democratic parliamentary government and a strong freely-traded currency. It has a free press and an open internet. The overwhelming majority of the stock market investments exposed to Mongolia are listed in foreign markets, which provides Quam with an investment base of companies with strong accounting and good visibility.
The fund currently has less than $10m under management, making it, as Ettedgui says: "Pretty small until you realise it's actually one of the biggest open-end funds in Mongolia." It is actually invested largely in Mongolian listings in other countries such as Canada, Hong Kong, the US or Australia which allows it to keep 90-95% liquid.
"People were investing earlier this year" Ettedgui says, "but now it's gone a little sour because of political changes and a new foreign investment law." Last year saw GDP growth of 17.3% in Mongolia. "The best in the world in the last three years and probably will be over next decade" Ettedgui says, but the first quarter of this year saw growth slow to 10% in the second quarter and now poor results again in the third quarter. "Growth of 10-12% is great but somewhat poor for a small country like Mongolia."
The new foreign investment law was hastily designed to block a deal from a Chinese company taking over one of its major co-assets but Ettedgui says that with Mongolia so reliant on China and Russia (90% of Mongolia's exports are represented by China) he feels that this was the wrong strategy. Next year's presidential elections may see further change and a likely swing back to high growth. "The sentiment is that investors are wary of political risk" Ettedgui says.
The fund was launched in August 2011 and, according to Ettedgui is comparatively the best liquid fund out there, beating the index by 15% and staying over 10% ahead of its main competitor. It suffered a drawdown of 30% over 2012 but in the last two months, Ettedgui has managed to grab 100% of the upside on average. "The investors have stayed with us" he says. "We have suffered no redemptions as they understand that this is a three to five year story - it's like a mine, it takes five years."
The fund could go long/short but in a 50 company universe with a lot of companies' market capitalisation at under $50m, there are very limited abilities to short.
"We've talked about Mongolia being so successful and we would do more but we would need to prove that Mongolia works first" Ettedgui says. "European investors like this fund, high net worths and family offices - everyone likes to have a bit of risk for high returns in their portfolio. People are trying to be ahead of the game but people have to understand there will be one or two bad years and then good years when you have a run and you have to expect that."
Benedicte Gravrand from Opalesque recently reported on Mongolia from a macro view. You can read that piece here
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.