Kevin Snowball likes a challenge, and in particular, an early stage market. He went to trade derivatives in Hong Kong when daily turnover at the HK Futures Exchange was 50 contracts a day and left when it was at 30,000 a day. And he launched PXP Vietnam Asset Management in 2003 when the country had 22 listed stocks and a total market capitalisaton of $160m. At the time, the index was at 166, it soared to 1170 in 2007, fell back to 235 in 2009 and now stands just below 500 points. "It's been an interesting but typical early state frontier market ride" Snowball says.
PXP now offers two Vietnam long only absolute return funds, one closed end and the other open-ended, and both focused on listed equities in the country. The portfolios across the two funds are similar, given the difference in fee structures and the impact of flows.
What drew Snowball to base an asset management company and launch funds in Vietnam was the little recognised size of the country. It's the 14th biggest country in the world and has a population of 90 million with a 95% literacy rate. It has significant natural resources, leading the world as the number one exporter of rice and second largest exporter of coffee after Brazil. It's a garment and footwear producer and is now attracting electronics production, with 24% of Samsung's mobile phones assembled in Vietnam which means that it is moving up the value chain. It also has a young population with 65% under 35.
As the population gets better off, it spends more money, putting liquidity back into the country. "We are essentially sector neutral or agnostic" Snowball says. "We are fundamental, research driven bottom-up investors so we aim to put together portfolios of the best listed companies in Vietnam." The firm currently manages $125m but has capacity for a lot more. Investors in the closed end fund which is listed on the London Stock Exchange can buy just one share so range from retail to frontier market funds of funds and hedge funds.
For the last two years, performance has been good - 2008 was not kind to them when the Vietnamese market fell 68% and the index has not yet recovered to anywhere near its all time high. The Vietnamese Emerging Equity Fund, the open ended fund, is up 17.38% year to date, 24.58% over two years, while the closed end fund, the PXP Vietnam Fund is up 23.52% year to date, 54.07% over two years, both to the end of August 2013. And both funds are estimated to have risen more than another 5% in September 2013.
Things are looking promising in Vietnam, Snowball says, reporting that the government is taking firm steps to increase foreign ownership in the country and attract outside investment. The Vietnamese Prime Minister Nguyen Tan Dung recently visited the US as reported on Bloomberg, pledging to subject state-owned companies to competition and allow greater foreign ownership of banks as the government seeks to revive growth and join a key trade agreement.
PXP finds that the Vietnamese Government has undoubtedly made significant macroeconomic progress through the resolute application of consistently strong monetary policy over the past two and a half years.
In the Vietnam Emerging Equity Fund interim report for 2013, the firm writes: "The Dong has been among the most stable currencies in Asia during that period, obviously assisted by the managed exchange rate against the US dollar but the pressures previously caused by high inflation and large trade deficits have been negated for the time being at least, and both are expected to continue to improve, the latter more so, and particularly over the longer term. Inflation was running at an annualised 7.5% in August 2013 but positive base effects for the remainder of the year suggest that 2013 inflation is likely to come in at approximately 6.5%, a steady improvement after the 18.6% and 9.3% levels recorded by the General Statistics Office for 2011 and 2012 respectively. The move up the value chain discussed in the Company's Annual Report for the year ended 31 December 2012, driven by higher value add manufacturing as the country diversifies production from garments to electronics will, we believe, make a significant contribution to Vietnam achieving another surplus in 2013 after the first in 20 years last year."
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.