Mongolia is landlocked between two most powerful countries – China and Russia – and is strategically positioned to supply raw materials for Chinese, Korean, Japanese and eastern Russian development. Mongolia is being transformed by the incipient exploitation of its high grade natural resources, located close to the world’s biggest consumer. The country can already deliver high grade coal to the Northern Chinese power stations at a price half that of Australian coal. So even if commodity prices were to weaken, Mongolia will always be the cheapest supplier.
Mongolia will maintain its high growth levels due to sustainable demand from China, not only for coal, but also copper, gold, molybdenum, rare earth and oil. In the next 10 years, coal output is expected to grow over 6x; iron ore 3x; copper 2x; gold 10x; and oil 13x (Eurasia Capital 2010).
The Oyu Tolgoi mine is expected to be one of the most profitable copper mines in the world employing 18,000 Mongolians. Investment at OT in 2011 will be $2.6b, a third of the entire Mongolian GDP.
As a country with a small population controlling natural resources of global magnitude, we envisage Mongolia becoming the Norway or Qatar of Asia. Indeed, 83% of Mongolia has yet to be prospected. Mongolia is the world’s 19th largest country (the size of Alaska) and the most sparsely populated country in the world. Ulan Bataar is the world’s coldest capital city and houses 40% of the population. Mongolians are 98% literate and the standard of business English in UB is excellent. The local government is a parliamentary democracy – keen to develop the living standards of the local people and is passing wealth down to the very bottom.
It is only in the last six months that the range and selection of Mongolian stocks has developed such an extent that it is liquid enough to establish a fund that can be accessed by a wide range of professional investors.
Our Investment Philosophy
The MONGOLIA Fund invests in listed companies exposed to the Mongolian economy.
Mongolia’s commodity-driven economy is prospering as a result of the deluge of foreign investment and its GDP growth is expected to outperform China’s in 2011. Yet the economy is only at a very early stage of its development cycle – GDP is expected to double by 2015 to US$15b (IMF 2010).
The fast-developing domestic Mongolian Stock Exchange has low liquidity despite its exponential growth, so our model portfolio is largely comprised of large market capitalisation, globally listed, liquid stocks with transparent track records and corporate governance at international standards. They are members of our benchmark Silk Road Index, which we developed to assist investment in Mongolia. Our approach is to invest conservatively and use the inherent market volatility to drive investment performance.
Our portfolio manager was involved in investing in former Soviet States such as the Czech Republic and Hungary over 20 years ago.
We have therefore experienced the dramatic opportunities of these markets as they develop. This transformational growth is so fast that standard economic metrics become irrelevant and is part of the process whereby significant value is created in companies exposed to the economy.