I’ve long been bullish about Vietnam as an investor. As a country market, it’s not perfect by any stretch of the imagination and has in the past proved something of a disaster for investors – too much money was raised on the London market by too many funds, most of which have now faded into obscurity. It was a classic frontier markets scramble but now only the strongest seem to have survived. Which is good news because I sense that Vietnam is probably a better bet than its bigger neighbour China. It has a more open economy, more focused on encouraging foreign investors to invest. It’s running less debt (at the moment) and its central government has fewer issues with unruly regions disobeying the centre. Its also more investor-friendly and seems to be more interested in meaningful economic reform, whereas the current leadership in Bejing appears to have a greater interest in making China into a militarily aggressive superpower.
There’s also the obvious argument that Vietnamese equity markets are very close to being promoted from frontier status to emerging markets. Chinese (and other Asian) manufacturers are flooding into the country, pumping up FDI, and wage rates are still low (especially when compared to some parts of China). So, Vietnam is shaping up to be a regional economic powerhouse. But the snag is that many listed equities have shot up in value, and now trade at baffling premiums. This makes any straight equity beta play in the local market challenging. Not surprisingly many local managers – and there some excellent outfits such as VincaCapital and Dragon – have switched focus and either gone for a focused stock picking strategy or jumped into the local private equity market.
VOF, the Vietnam Opportunity fund, has chosen to focus on the latter route, devoting more money to PE investments. It’s still a big main markets investor but it is increasingly focusing its firepower on buying into local private businesses – and there’s real evidence that this seems to be working. Today VOF released its annual results for the year to 30 June 2017. According to Numis “these mark another strong year for performance with the NAV up 25.5% in US$ terms versus an increase of 20.6% in the Vietnam Index (following on from a 15.3% return in the previous financial year versus 4.3% for the benchmark), although in 2017 YtD relative performance has been hampered by the drag of a relatively high cash balance. Returns were driven by a combination of strong earnings growth (38.7% on average across the portfolio) and multiple expansion. Since 30 June, VOF’s NAV is up a further 3.0% to 13 October, compared to a 5.7% rise in the Vietnam index.”
The listed equity portion of the portfolio represents 70.0% of net assets and rose 32%, “with the key contributors being Airport Corporation of Vietnam (airport operator) +45%; Hoa Phat Group (steel producer) +53%; and Vinamilk (diary products) +39%”.
Turning to the PE portfolio, deals seem to be taking longer to complete but the good news us that recent transactions have, thankfully, picked up again – investments this year include $11m in the Orient Commercial Bank in October, as well as $11m in FPT Digital Retail (mobile phone distributor) and $11m in Tascoa (toll road operator and real estate developer) in August. According to Numis “the current pipeline for private equity investment is strong, with nearly $200m of opportunities in companies operating across a range of sectors focused on domestic growth including healthcare, media/entertainment, infrastructure, materials, industrials/logistics, and transportation. VOF’s PE holdings are typically pre-IPO investments or growth capital, and the managers are typically looking to invest on a three-to-four year time horizon.”
The dividend has now been set at 2% of NAV, plus there’s an active share buyback policy, all of which should help narrow down the discount to below 20% (roughly the current level) and then 15%. Overall my own hunch is that Vietnam should be a core holding for any internationally minded adventurous investor – I’d be tempted to run the Vietnam allocation not too far below that of any China holdings you have (my guestimate would be around 25% of any EM portfolio). There are some ETFs tracking Vietnam but I’d avoid them like the plague, and currently, I’d put VOF as a core investment trust holding.