Fund manager Oliver Bell is backing Sri Lanka in his five FE Crown-rated T. Rowe Price Frontier Market Equity fund, as it offers investors an “attractive multi-year investment opportunity”.
According to the fund’s most recent factsheet, Sri Lanka represents a 10.1 per cent holding in the portfolio, the fourth largest country holding behind Argentina, Vietnam and Kuwait.
Indeed, the fund is 8.6 per cent overweight to the country relative to the MSCI Frontier Markets index benchmark.
He said: “While it is easy for investors to overlook Sri Lanka due its close proximity to larger and highly-populous neighbour India, we believe there is significant untapped potential in this frontier economy.
“We found plenty of promise during a recent research trip to the diverse Asian country, in particular its strategic Indian Ocean location.”
Yet, while the MSCI Sri Lanka index has risen by 43.2 per cent over five years, it was up by just 1.33 per cent over three years. Year-to-date the index has grown by 1.99 per cent.
Performance of index over 5yrs
Source: FE Analytics
The country’s main market, the Colombo Stock Exchange had a market capitalisation of $19.8bn at the end of July and has seen just two new listings so far this year raising $31m.
However, Bell said the country’s appeal lies in its geographic location which is “perfectly situated along the main shipping route between Asia and Europe”.
“Colombo, the Sri Lankan commercial capital, is home to the country’s largest port – which currently has three major associated quays,” he explained.
“These quays are each owned by the Sri Lankan government, the Chinese, as well as John Keells Holdings – Sri Lanka’s largest listed conglomerate.”
Indeed, John Keells is a top 10 holding for the fund – representing 2.6 per cent of the portfolio – and Bell believes the construction of two further quays for the Colombo port are likely to draw interest from investors, particularly from neighbouring India and regional superpower China.
“China is well aware of Sri Lanka’s strategic location and has invested heavily in the country over recent years,” he added.
“Despite some setbacks – largely related to India’s fears over Chinese military influence in the area – Sri Lanka late last month finally signed its long-awaited $1.1bn deal with China for development and control of the southern port of Hambantota. This project forms part of China’s giant trillion-dollar ‘One Belt, One Road’ initiative.”
Bell (pictured) said the firm believes the island nation could witness a multi-year construction boom, noting the resumption of China-led developments and several large-scale public and private projects in the pipeline.
He said: “Tokyo Cement, the largest cement manufacturer in Sri Lanka, has a 32 per cent market share in the country and has recently increased its capacity by one million tonnes to 2.8 million. This capacity increase will displace imported cement.
“Access Engineering is another direct beneficiary of Sri Lanka’s medium-term infrastructure development plans – with the company involved in projects across numerous sectors.
“While Access has been growing its order book by 20 per cent a year, the group has the ability to grow even faster, but has been prudently selective with its projects.”
As well as a pipeline of projects, the manager highlighted the “positive momentum” of Sri Lanka’s reform agenda “after almost three years of government inactivity”.
“We believe these reforms have the ability to further accelerate economic growth in Sri Lanka, a country already fortunate to boast a highly-educated workforce and a growing number of international tourists,” he said.
Underpinning this is Sri Lanka’s economic growth, which Bell said is forecast to reach up to 5 per cent this year, softer than previously expected due to several recent natural disasters.
The manager said the Central Bank of Sri Lanka is now at the end of its “benign hiking cycle”, which saw interest rates tightened to control credit expansion and inflation brought down to 5 per cent.
“Despite the tighter monetary conditions, we believe the strong-growing Sri Lankan bank sector is cheap relative to historic price-to-book levels and is currently displaying solid growth,” he said. “The sector is likely to receive a further boost over the medium-term as the rate hike cycle has now likely concluded.”
Bell is not the only fund manager backing Sri Lanka in his portfolio.
FE Alpha Manager Mary McBain, manager of the £397.3m CF Ruffer Pacific fund, also has a significant geographic exposure to Sri Lanka, which represents 10 per cent of the portfolio.
The five crown-rated, £276.7m Stewart Investors Indian Subcontinent fund – overseen by FE Alpha Manager David Gait and co-manager Sashi Reddy – has an 8.4 per cent exposure to Sri Lanka.
Lastly, the four crown-rated $889.1m Templeton Frontier Markets fund – co-managed by Carlos Hardenberg, Ahmed Awny and David Haglund – has invested 5.49 per cent of the portfolio in Sri Lankan stocks.
Bell said he is convinced that Sri Lanka was an “attractive multi-year investment opportunity”.
“While there is a danger we might be too early, our thesis is predicated on continued positive government reforms and we were impressed by what we witnessed during our recent visit,” he said. “We believe the authorities are finally on the front foot.”
Under Bell, the T. Rowe Price Frontier Market Equity fund has risen by 37.06 per cent over three years compared with an 18.69 per cent rise in the MSCI Frontier Markets benchmark.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
The fund aims to identify long-term market leaders in countries on the cusp of rapid development.
It has exposure to a range of different frontier markets, the largest – Argentina – represents an 18.7 per cent weighting in the fund. Its largest holding is National Bank of Kuwait, which makes up 7.1 per cent of the portfolio.
The fund has an ongoing charges figure (OCF) of 1.75 per cent.