QD view – Vietnam, big on ambition

Vietnam celebrates its ‘Reunification Day’ on 30th April each year. The date, which is one of the largest public holidays in Vietnam, marks the day when North Vietnamese and Viet Cong forces captured what was then called Saigon (now Ho Chi Minh City), the capital of South Vietnam, ending the Vietnam War.

This year marks the 49th anniversary of that day and much has changed in the years since, particularly in the last couple of decades, as the ruling communist party has embraced an economic liberalisation that has seen progress in many areas: Vietnam’s economy has grown and opened up significantly; the country benefits from a large amount of FDI, its manufacturing industry has boomed (in part aided by some Chinese manufacturing shifting to the country) and moved up the value chain; the economy has become more stable; this growth has helped reduce poverty and driven growth in consumer spending as well as the emergence of a middle class; and its financial markets have seen massive development and continue to grow apace.

With the half-century approaching in a year’s time, the government is already looking ahead to 2025’s celebrations and wants to be able to demonstrate progress in key policy areas. Consequently, there is a push to speed up projects in a whole range of areas such urban construction, infrastructure, and social welfare. Although, reflecting the way in which the country has changed in recent years, the prime minister announced in January that the country’s priorities also include digital transformation, science and technology, artificial intelligence, and the green transition.

These ambitions all dovetail with the government’s plans to see the country grow from lower-middle-income status to upper-middle-income status by 2030 and a high-income country by 2045. Against this backdrop, I thought now would be a good time to revisit the handful of London-listed funds that offer a pure play exposure to what has been and looks set to remain a high growth market, all of which sit in the country specialist sector. These are Vietnam Holding (VNH – the smallest of the three but the best performing over the last five-years with an NAV total return of 13.0% per annum); VinaCapital Vietnam Opportunity (VOF – the second largest and second best performing over five year with an NAV total return of 10.6% per annum) and Vietnam Enterprise Investments (VEIL – the largest and third-best performing over five-years with an NAV total return of 6.5% per annum). As we touch on below, the three are quite different propositions.

At this point, I think it is worth reminding readers that Vietnam remains a frontier market, which is a key reason why we think investment in the space is best delegated to a professional manager with boots on the ground. As the performance of the funds shows (see below), significant gains can be achieved by managers that are able to do research and uncover opportunities in less well-researched areas of the market. However, these sorts of investments are not without their challenges and are not easy to do direct.

Another thing to remember is that Vietnam is the largest of the frontier markets by some distance (at the end of March 2024 it accounted for 28.57% of the MSCI Frontier Markets Index with the next largest, Romania, accounting for 12.21%) and has, for some time, been an obvious candidate for promoting to emerging markets status. In fact, a number of Vietnam’s neighbours in southeast Asia – such as Thailand, Indonesia, Malaysia, and the Philippines – have enjoyed emerging markets status for years and it is perhaps not surprising that, amongst its 2025 goals, the Vietnamese government has set itself a target of being upgraded to emerging market status by the end of 2025.

While significant progress was made last year, liquidity in the Vietnamese market remains an issue and further reform, which has been slow so far, is needed to achieve this. The prize for doing so is big as it could open up the market to possibly enjoying billions of dollars of foreign capital flow into Vietnamese stocks every year. This alone should raise share prices over the longer term but the fact that index tracking funds would suddenly need to hold key Vietnamese stocks would be an instant win for the funds already invested.

As noted above, VNH has been the best performing over five years, but it has had a particularly strong 12 months with its NAV up 27.5%, while its share price is up some 38% reflecting a sharp closing of its discount following the announcement of that it will offer annual tender offers (the first is on 30 September this year). VNH is focused on generating long-term capital appreciation by investing in a concentrated portfolio (typical 24 stocks) of high-growth listed companies in Vietnam that demonstrate strong environmental, social and corporate governance (ESG) awareness. Turnover is low and the portfolio is distinctly different from the index. Its portfolio has a strong focus on three major themes – industrialisation, domestic consumption, and urbanisation – reflecting the manager’s view that a growing middle class is driving GDP growth and therefore consumption in a virtuous circle.

VOF has also had a pretty strong 12 months (an NAV return of 16.5%). Unlike VNH, which only invests in listed Vietnamese equities, VOF has around 75% of its assets in listed investments with the balance, excluding cash, in what it describes as “privately negotiated opportunities across listed, private equity and SOE assets”. This will tend to make its NAV more stable, but it will be less sensitive to the potential rerating opportunity from an upgrade to emerging market status described above, as any uplift in the value of its unquoted assets will come with a lag. Of the three funds, VOF is the only one to charge a performance fee, although it has the lowest OCR excluding performance fee of the three (1.70%). Anecdotally, unlike VOF, the other funds tend to avoid SOE assets as they feel that they tend to come with greater corporate governance risks – principally in relation to political interference.

VEIL, the largest of the three, is focused primarily on listed equities – it can invest in pre-IPO companies but doesn’t tend to do so. It has lagged its peers recently – its NAV return over the last year is close to one third of VNH’s, but still a respectable 9.3%. Reflecting its size, VEIL is more biased towards large cap companies than VNH and has a particularly strong focus on banks (39.8% as at the end of March 2024), real estate (17.7%) and materials/resources (13.6%) – areas that have been more challenging recently.

Another big influence on returns has been a corruption clampdown that culminated recently in a death sentence for Truong My Lan, who was reckoned to have committed a colossal $12.5bn fraud, and resignations of the head of Vietnam’s parliament Vuong Dinh Hue, and two presidents – Vo Van Thuong and Nguyen Xuan Phuc. This Augean clear-out should, in the medium-term, help improve foreign investors’ confidence in the country.

To summarise, the evidence suggests that Vietnam has a long growth runway ahead of it, coupled with the ambition to achieve this. We think that all of these funds should benefit from this but, if I had to pick one, VNH seems to be the one that’s able to be most nimble in what remains a less liquid market and, with an annual tender at fair market value (albeit it at the board’s discretion) there is added comfort of being able exit at or close to NAV in normal market conditions. Adopting the redemption facility has seen the discount narrow significantly and if the current strong run of performance continues, we could see VNH trading at a premium and potentially issuing stock with the benefits of scale and additional liquidity this should bring.

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