Vietnam has not been flavour of the month among foreign investors in the past few years, but Thomas Hugger, chief operating officer of Asia Frontier Capital, feels the country’s luck is about to change.
Admittedly, it heavily in his interest to say so – his Hong Kong-based firm today launches an open-ended fund focused on Vietnam. Open-ended funds are new to Vietnam, having been given the green light this year.
The strategy, with an initial $50 million, will invest in small- and medium-cap stocks listed on the Hanoi and Ho Chi Minh exchanges.
The firm already has a frontier markets-focused vehicle, which was originally run by Leopard Capital. Hugger parted ways in July from Douglas Clayton, his former partner at Leopard, via a management buyout. Clayton remained at Leopard running two PE funds focusing on Cambodia and Haiti.
The new AFC Vietnam Fund is launched as a new share class under the $4 million umbrella AFC Asia Frontier Fund, which invest in markets such as Bangladesh, Cambodia, Iraq, Laos, Mongolia, Myanmar, Pakistan, Papua New Guinea, Sri Lanka and Vietnam.
The strategy will invest in 40-60 small- to mid-cap stocks across various sectors, with about a quarter of its exposure in the consumer sector. Like the AFC Asia Frontier Fund, the Vietnam vehicle will limit exposure to the financial sector by investing only in insurance or securities companies. For now, it is unlikely to invest in any banking stocks, Hugger says, but that might change.
(Foreign investors have traditionally been wary of Vietnam’s banking sector as being laden with bad debt. Non-performing loans as at the end of July totalled 4.58% of commercial banks’ total loans, according to the country’s central bank.)
Hugger argues that the price differential between small-to-mid-cap stocks and blue-chips in Vietnam is “too large” compared with that in other markets.
AFC follows a reference portfolio of 50 small- and mid-cap stocks with an average price-to-earnings ratio of 6x for 2013, a dividend yield of 9.1% and a price-to-book ratio of below 1. That compares to a 11x p/e ratio for the Ho Chi Minh Stock Index, a dividend yield of 3.9% and a 1.74 times p/b ratio as of last week.
In addition, Vietnam appears cheaper than neighbouring markets in terms of p/e multiples and dividend yield terms, says AFC. Thai equities are trading at 12.7 times p/e multiples with 3.3% dividend yield, while Philippine stocks are trading at 17.2 times multiples with 2.4% dividend yield.
The Ho Chi Minh Stock Index dropped some 80% from its peak of 1,170.67 on March 12, 2007 to a low of 234.66 on February 24, 2009, he notes. As of yesterday, the index stood at 511, where Hugger suggests it has hit bottom.
He says he does not see many new funds being raised at this point, and argues that the new strategy will achieve “significant capital appreciation”.
Moreover, Hugger argues that Vietnam’s increasing foreign reserves as a percentage of its external debt, at 44% in 2012 and forecast at 54% this year, will support its currency (the dong) and balance of payments.
Alongside the launch, Asia Frontier Capital has hired two new executives, bringing its headcount to six. Both are currently based in Thailand.
Andreas Karall is chief investment officer for the new fund, having previously worked for various banks and fund managers in Europe. Karall has 25 years of portfolio management experience.
Meanwhile, Andreas Vogelsanger has joined as head of marketing for the fund and will target family offices and wealthy individuals from Europe and Southeast Asia. Vogelsanger has worked for private banks such as Julius Baer and RBS Coutts, both in Europe and Asia.