Why Caution Prevails With Investing In Family-Run Businesses In Pakistan Despite Strong Management 1

Strong management teams in Pakistan

Frontier Markets Fund manager James Bannan at Coeli Asset Management, sees relatively strong management teams in Pakistan (PAK). “They are well educated; astute in doing business in a relatively difficult environment; and easily accessible,” Bannan told Frontera. However, he does advise caution towards family-run businesses in the country.

Coeli Asset Management, with $322 million AUM, maintains an investment approach focusing on high quality (high ROIC) companies that give domestic exposure to the frontier markets (FRN) (FM). Coeli’s top Asian markets for 2017 include Vietnam (VNM), Pakistan (PAK), and Bangladesh. As of March 2017, Coeli’s Frontier Market Fund’s top 5 holdings included United Bank Limited of Pakistan. The stock commands a 4.7% allocation in the fund’s portfolio.

Protection of minority rights by authorities is insufficient in Pakistan

Bannan, however, does not fail to recognize the vast variance in the level of corporate governance across firms in Pakistan. “There are huge differences in standards between the hundreds of listed companies in the market,” he told Frontera. So Pakistan, like any emerging market (EEM) (VWO), has room for improvement in corporate governance and transparency.

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Word of caution: family-run businesses in Pakistan

Of particular caution for investors are certain family-run businesses in Pakistan. Bannan cited the example of Engro Corporation, a Pakistani public multinational corporation involved in the production of fertilizers, foods, chemicals, energy, and petrochemicals. Last year, Engro sold down most of its stake in Engro Foods to a Dutch dairy cooperative FrieslandCampina. “The deal was great for Engro but exploited the minority shareholders, many of whom were foreign,” he stated. Engro Corporation and FrieslandCampina imposed erroneous charges on Engro Food’s existing products, effectively halving the profit previously available to minorities.

He explained further, “The exploitation of minority shareholders by Engro was a reminder that investors need to do careful due diligence of the track records of the families running Pakistani businesses because the protection of minority rights by authorities is insufficient.”

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