The £570m VinaCapital Vietnam Opportunity Fund (LON:VOF) has just announced a strong set of half-year results for the six months to the end of December. VOF’s NAV was up by 10.9% in US dollar terms over the period, which was well ahead of the 3% increase in the benchmark, and it has continued to do well in 2017 with a further 6% gain.
These sorts of high risk single country funds are not suitable for everyone, but the strong underlying performance and fall in the pound enabled the shares to record a 6-month gain of 29.9% for UK investors. It is also a good size with assets under management of £722m and decent liquidity with an average daily value of shares being traded of £1.1m.
Another of the fund’s key attractions is that it offers a diversified multi-asset exposure. This is dominated by the 60.6% allocation to the listed and over-the-counter (OTC) equity portfolio, but is complemented by smaller investments in private equity, real estate and property development assets.
The bigger picture
In 2015 Vietnam relaxed its 49% cap on the foreign ownership of some of its domestic listed companies as part of a wider ongoing package of market friendly reforms. The changes have helped to pave the way for a possible upgrade from frontier to emerging market status.
If the country were to be reclassified it would be a real game changer and attract huge amounts of foreign investment into the local stock market. In order to do this it would have to meet all of the index provider MSCI’s criteria, although it is likely to be a lengthy process.
Another reason to be optimistic is the favourable demographics as half of its 94 million population is under the age of 30 and literacy rates are up above 90%. Like many of the emerging markets it has a growing middle class that should help to support the development of the domestic consumer sector.
Despite all the positives it is still a one-party communist state with the economy dominated by state owned enterprises including the banks. There have been some partial privatisations over the last few years, but the process still has a long way to go.
Supportive backdrop
The economy grew by 6.2% in 2016 and has a target growth rate of 6.7% this year, which seems achievable due to the strength of the manufacturing sector and domestic consumer demand. Inflation is expected to remain under control at less than 4% and the currency is stable against the US dollar, although FX volatility can never be ruled out.
Local share prices are no longer as cheap as they once were with an average PE ratio of 15.9 times earnings, but the investment managers of the fund, VinaCapital, expect average earnings growth to be 10% to 15% in 2017. The market is also being supported by an increase in the government’s privatisation programme that has seen a number of major listings in the last few months.
If the country were to be reclassified it would be a real game changer and attract huge amounts of foreign investment into the local stock market.
The government is using the proceeds to reduce its sizeable budget deficit and has said that some of the country’s largest enterprises will privatise and list in 2017. They have made this claim before, but have been aggressively pushing deals through, although the stakes haven’t been as large as external investors have wanted and some of the valuations have been on the high side.
Positive developments
VOF’s equity portfolio returned 11.3% over the six months with many of its strongest performers being recent listings and pre-IPO OTC investments. A good example is the Airport Corporation of Vietnam, an airport operator that was originally a state-owned enterprise that the fund gained access to before the IPO. This was up an amazing 194% during the period.
Private Equity holdings make up just under 10% of the portfolio and allow the fund to target companies that are yet to float. The managers typically invest on a 3 to 4 year timeframe with the current holdings including a dairy company and a 200 bed hospital. The current pipeline of opportunities is really strong with around $150m of investment required across a number of sectors.
A less successful area has been the real estate allocation that is currently being wound down. This has provided a drag on the performance in recent years and includes property development assets that are in the process of being sold off. These projects make up about 7% of the fund, but despite this the managers remain positive on the outlook for the property sector and are heavily invested in quoted real estate stocks and construction material companies.
VOF moved its listing from AIM to the main market of the LSE on 30th March 2016 and also relocated its domicile from the Cayman Islands to Guernsey. It shares are now quoted and traded in pounds, rather than US dollars, and this made it eligible for inclusion in the FTSE All-Share with the promotion taking place last June. Another positive step for investors was that it recently moved from a monthly to a weekly published NAV.
The Board instituted a share buyback programme in October 2011 and since then has spent $260m repurchasing almost 40% of the company’s issued share capital. This, combined with a more active marketing campaign, helped the discount to narrow from 25.2% to 19.1% over the six months.
Outlook
One of the main reasons to be cautious is the withdrawal of the US from the Trans-Pacific Partnership (TPP). Vietnam was widely regarded as the greatest beneficiary of the 12 nations involved in the pact, and some believe that TPP was the impetus behind a fair amount of the foreign direct investment flowing into the country over the past few years.
There is bound to be some ramifications, but it is important to note that Vietnam is party to 16 Free Trade Agreements, including those with Korea, the EU, Russia and Asean Economic Community. The government has already confirmed that many of the reforms being implemented to comply with TPP will continue regardless and it remains intent on increasing its integration with the rest of the global economy.
Another issue with the fund is its high fees. These comprise an annual management fee of 1.5% of NAV, as well as a performance fee of 15% of the increase in NAV with an 8% hurdle rate and a cap of 1.5%. This resulted in ongoing charges for 2016 of a hefty 2.07%.
The high costs are unwelcome, but the shares have still done well with a six month gain during the reporting period of 29.9% in sterling terms. Despite this they remain on a wide discount to NAV of 21% that the broker Numis Securities believes “offers considerable value”.
VOF would be suitable for adventurous investors who are comfortable with the high level of volatility that is inevitable with a single country fund linked to a frontier market. It is the sort of long-term holding that could generate strong returns, especially if the country is eventually included in the MSCI Emerging Markets index with all the attendant capital inflows.