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Today I make another departure from my usual small cap territory and take a look at another investment trust. The Vietnam Opportunity Fund (VOF) is a London listed Investment Trust focusing on Vietnam. The trust is currently valued at £530m with shares changing hands at 256p. As with all investment trusts you need to get comfortable with both the macro and the micro though.
The Macro – Does Vietnam promise returns?
Vietnam has been growing fairly consistently between 5% and 6% each year in the last decade with the most recent data suggesting a growth rate of 5.93% to the 9 months ending September 2016. This places Vietnam as the fastest growing economy in the world after India for 2016. As Latin America and other Asian economies slow Vietnam is the standout emerging market opportunity in my view.
A big catalyst for this growth is the steady liberalisation which has resulted in the country opening up to Foreign Direct Investment. Samsung is a recent beneficiary, recently setting up manufacturing plants focusing on various electronic goods.
The recent softening on foreign ownership rules allow foreign companies to take bigger stakes in local companies too, also encouraging is the fact that ‘Vietnam is also keen to make its stock market more attractive by winning an upgrade from “frontier” to “emerging” market status in the influential MSCI index. While Vietnam’s population is a third bigger than that of neighboring Thailand, the Ho Chi Minh City bourse is less than an eighth of the size of its counterpart in Bangkok.’ This could also make Vietnam stocks more attractive to overseas investors and provide necessary capital for the economy to grow further.
There is still plenty of potential growth to come too if the capital does arrive. If you compare Vietnam to other countries in the region (fig 2) despite all of the progress so far Vietnam still has one of the lowest GDP per Capitas in the region.
What about the macro risks?
Vietnam has been politically stable in recent years. There is an ongoing geopolitical concern around territorial claims in the South China Sea. This has been brewing for a while but no major escalations have occurred of late. There are also economic risks to consider, the government has a relatively high debt and foreign currency reserves covering just 2-3 months of imports. As with overseas assets there is always a currency exposure to contemplate, the VND has been steadily strengthening against sterling since 2014, posting 15% gains to date. Any strength in sterling would reverse this trend and impact future gains, but overall I would expect the potential gains from the underlying assets/environment to be capable of delivering well in excess of this.
What about the fund – is this the right vehicle to get exposure to Vietnam?
The fund invests in a broad range of sectors focusing on domestic growth opportunities. Roughly 50% of the portfolio are in listed stocks with the remainder in a variety of assets.
Performance on the portfolio has been excellent in recent years. When it comes to ‘frontier’ markets this trust is a good example of where it can pay to choose an active manager as opposed to an Index tracker such as an ETF. The Vietnam Opportunity Fund manager VinaCapital has done very well against the the benchmark beating the MSCI Vietnam Index by 131% over the past 5 years. Despite this performance the trust still trades to a huge 22% discount to NAV. This can be partly explained by holding 50% of the portfolio in less liquid assets where there is not always an active market to get an up to date valuation.
The fund does though plans to tackle the large discount through a share buy back programme, it has also Sold it’s real estate holding in the Sofitel Hotel. This was at sizeable premium to NAV and was quasi related transaction to ‘to a newly-formed hospitality joint venture between it and US private equity firm Warburg Pincus’. This is inline with the funds strategy to exit real estate investments and focus on equities.
The manager has a solid track record in this fund and the Vietnamese economy has a promising outlook. Vietnam has all the signs of being the next big thing and this trust is an excellent way of getting exposure.
Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. I do plan to open a long position in the near future equal to around 2% of my net assets.
This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.