One Pakistan adventure paying off

Investors in frontier markets are accustomed to the idea of risk. For those contemplating exposure to Pakistan, however, there is an added element of notoriety.

In addition to the usual frontier market tales of political turmoil, corruption and exposure to commodities price cycles, Pakistan must also bear the cost of its long-running disputes with India and its strategic importance to the US in its war on terror.

With Pakistan so much in the news for the above reasons it is no surprise that few fund managers have set up single country Pakistan funds.

However, newly established Swedish fund manager, Tundra Fonder, was determined to look beyond the headlines.

Tundra was founded in September last year by partners Johan Elmquist and Mattias Martinsson. By October the group had launched its first funds, one investing in Russia and the other in Pakistan. In February Tundra unveiled a third offering: the Global Emerging Markets Agri & Food Fund.

Launching Tundra Pakistanfond was a particular ambition for Mr Martinsson, the fund's lead manager, who had formed a personal conviction in the country's growth story. Even he has been taken by surprise, however, by how well things have gone. By last month, Mr Martinsson says, he and Mr Elmquist had noticed an extraordinary thing - the Tundra Pakistan fund was on top of the most clicked list, "Mest clickade fonder " on the Swedish version of Morningstar, the fund news and data provider.

Investors have not only been clicking. They have been investing too. "We currently have approximately $65m in assets under management of which a little bit more than $50m right now is in the Pakistan fund," says Mr Martinsson.

Early investors have already been rewarded. By May 31, year-to-date returns were 27.9 per cent, according to Morningstar.

Mr Martinsson says the strong inflows into Tundra's Pakistan fund could be due to the structure being something that investors can understand and trust - it is Ucits IV compliant and open for daily trading. A buoyant period for Pakistan's stock market (the KSE 100 has risen more than 20 per cent since January 1) might also have been helpful. But these factors cannot explain the whole story. The World Investment Oppportunities Funds - Pakistan, a Luxembourg registered Sicav still has only $1.75m in assets under management and it launched in 2008.

Consider also the very different fortunes of the db x-trackers MSCI Pakistan Investable Market Index ETF. Marco Montanari, head of Deutsche Bank's db x-trackers ETFs and db-x funds Asia, says the Pakistan ETF was the first exchange traded fund to be linked to Pakistan.

The synthetic offering, which is also Ucits-compliant, was launched six months ago and has managed to attract just $5m. Its lacklustre start compares with some of Deutsche's other single country ETFs for other frontier Asia markets, which have been runaway successes. Mr Montanari says its Vietnam ETF is the largest single country frontier market ETF in the world with $280m in assets under management. The Philippines ETF, launched in April last year, recently reached $30m with most of the inflows achieved this year, according to Mr Montanari.

Deutsche's Pakistan experiences chime with reports earlier this year that investors remained cautious despite the stock market rally.

Even Mr Martinsson admits it was not an easy start. "From a marketing perspective it was terrible. [Karachi stock exchange] volumes in December were at a 13-year low," he says.

Nonetheless, he says Swedish investors are particularly accustomed to risky propositions having embraced the early Russia funds.

It is currently denominated only in Swedish krona and marketed only in Sweden and Finland, although there are plans to launch soon in Norway. The next natural market, says Mr Martinsson, would be the UK because of its large Pakistani population.

Whoever invests, and Mr Martinsson believes it will be another two to three years before institutions come on board, Tundra is recommending a 10-year investment horizon. The fund is required to hold a minimum of 90 per cent in Pakistan stocks; the rest can be held in cash. It is focused on the "investable" universe of 40 stocks out of the KSE100 of which it has holdings in 26. There is an annual fee of 2.5 per cent and no performance fee.

Now that Mr Martinsson has scored his early mover advantage, he would like other foreign managers to enjoy similar success. "The best thing for the market would be if one of the big players went in," he says.

If Tundra's experience is anything to go by, it might be wise for those that follow to concentrate their marketing efforts on the Nordic region.

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