One Allan Gray investment in obscure Georgian banks returned over 500%

Allan Gray’s generated returns of over 1,000% from one of its investments in Georgian banks in the aftermath of the Russian invasion of Ukraine. 

This was done through the asset manager’s Frontier Markets Equity Fund (Frontier Fund), which specialises in investing in frontier equity markets, which are broadly seen as emerging markets that are small or illiquid. 

These markets are typically seen as too risky to be even classified as emerging markets, but this tends to come with outsized rewards if done well. 

Allan Gray’s Frontier Fund aims to outperform the MSCI Select Emerging and Frontier Markets Access Index over the long term without taking on greater risk of loss. 

However, the fund’s factsheet does warn investors that there are significant risks involved with investing in frontier markets, as their financial systems are relatively undeveloped and unsophisticated. 

These risks include the imposition of capital controls preventing the repatriation of foreign currency, highly volatile returns, and low liquidity, which may force limited flows into and out of the fund. 

Allan Gray’s Frontier Fund is sizeable, with assets under management of around $1.5 billion (R25 billion). 

The fund has shown significant outperformance relative to its benchmark over the past eight years, with it returning a cumulative 191.1% versus 74.3%. 

This comes with exposure to markets that are typically left alone by traditional asset managers due to the risks associated with investment. 

In Allan Gray’s case, this includes investments in countries such as Kazakhstan (18.1% of the fund’s equity exposure), the Philippines (15.1% of equity exposure), and Vietnam (10.2% of equity exposure). 

One thing most frontier markets have in common is higher economic growth relative to their more developed peers. 

This not only means there is an increasing pool from which companies can generate higher earnings, but also opportunities for outsized returns based on individuals’ businesses leapfrogging by copying developed-market peers. 

These opportunities are increased by the volatility of these markets, which can offer very attractive entry points for investors to generate outsized returns. 

The Georgian banking boom

The Frontier Fund is how Allan Gray managed to be exposed to the rapid appreciation in the share prices of Georgian banks amid the war in Ukraine. 

Speaking at the asset manager’s The Times roadshow, Allan Gray’s Sean Munsie explained how this investment played out and the returns it generated for clients. 

Munsie explained that such an experience informs their investing approach during the current conflict in the Middle East, with it throwing up chances to buy well-run companies relatively cheaply.

“When we think of investing through a similar conflict in 2022, when Russia invaded Ukraine, we had exposure to Georgia of all places,” Munsie said. 

“You might say, ‘That is an obscure investment. How on earth are you exposed to Georgia?’”

This exposure was through the Frontier Fund, which had one of its principal investments in Georgian banks at the time of the invasion. 

The invasion saw the market capitalisation of major banks in Georgia get cut in half, with analysts fearing further invasions into other former member states of the Soviet Union. 

“We had some investments in the big banks in Georgia. They have sort of an oligopoly-type structure similar to our banking market in South Africa,” Munsie explained. 

“We had invested in three shares. Two banks and one holding company which owns a third bank. The shares sold off rapidly after the invasion and halved in value.” 

Munsie said that these banks dropped to a price-to-earnings ratio of around three times. For context, South African banks typically trade at around ten times earnings. 

“We held our investment in these banks, and we saw these positions over the following four years rise by between five times and 12 times,” Munsie said. 

“The point of this is that the impact of conflicts can be counterintuitive and you have to trust your investment thesis and be ready to act with conviction when opportunities arise.” 

Georgia’s banks have profited immensely from the war in Ukraine, with many wealthy Russians fleeing to the country, bringing wealth and trade with them. 

This, along with other factors, led to a stronger local currency, lowered inflation, and pushed bond yields downwards, greatly improving the performance of the Georgian banks. 

“We continue to hold exposure to these banks and they currently make up just less than 20% of our Frontier Fund,” Munsie said.