The Vietnam Holding investment trust is gearing up for a wave of fresh foreign investment after FTSE Russell upgraded Vietnam to an emerging market earlier this month.
Writing in the trust’s annual report released on Monday, Hiroshi Funaki, Chairman of Vietnam Holding, said that beyond the promise of additional capital, the upgrade “represents international recognition of years of market reform and sends an important signal to global institutional investors about the maturity of Vietnam’s capital markets.”
Analysts estimate it could draw $5bn to $10bn of foreign investment, potentially powering the next leg of Vietnam’s equity market – in which Vietnam Holding exclusively invests.
Digging down into performance, the London-listed investment trust said its net asset value per share rose just 4.5% in the year to 30 June, against a 32.4% gain for the Vietnam All Share Index.
However, the gap was almost entirely due to extraordinary narrowness in the benchmark’s gains and the manager’s disciplined approach of not chasing overvalued companies. During the period, shares in the conglomerate Vingroup surged 357%, and its Vinhomes property arm doubled, together accounting for much of the index’s advance.
Because VNH does not own Vingroup, the fund underperformed, even as its holdings of banks, retailers and industrial companies delivered resilient earnings.
The manager, Dynam Capital, defended its decision not to chase the rally, arguing that Vingroup’s flow-driven valuation and complex, loss-making affiliates did not fit its discipline of buying well-governed, profitable companies at reasonable prices.
Their approach has been vindicated in recent months, with Vietnam Holding’s NAV rising 7.6% in August compared to a 6.6% gain for the benchmark.
It noted that its portfolio traded on around 10 times forecast earnings, below the wider market, despite strong expected earnings growth.
Vietnam is a long-term story, and the trust has adopted this approach to portfolio construction and asset allocation, reflected in a 15-year CAGR NAV return of 10.3% compared to 8.9% for the benchmark.
The Vietnamese economy continues to deliver astounding growth, posting 8.2% GDP expansion in the first half of the year, driven by foreign investment. This will underpin the investment thesis in the coming years.
And a disconnect has emerged that may prove an opportunity for Vietnam Holding investors. Even as foreign investment flows into the economy, foreign investors have been net sellers of equities over Vietnam Holding’s reporting period, and the manager argues its cheaper, higher-quality holdings were well placed to benefit as that trend reverses.