VietNam Holding — The next five years and beyond

Dynam believes that Vietnam is currently going through an acceleration in economic growth. Exhibit 1 illustrates that at the turn of the millennium, the Vietnamese economy was worth c US$30bn. This has now grown more than 10 times to c $340bn (in nominal terms). The team expects it to reach US$0.5tn within five years.

Vietnam is a very open economy for international trade. The Global Economics think tank ranks Vietnam eighth in the world by trade openness (which is exports plus imports as a percentage of GDP). For example, during 2020, Vietnam successfully concluded a number of trade agreements, including entering the Regional Comprehensive Economic Partnership, covering the Asia-Pacific region, initiating an EU free trade agreement and entering into a free trade agreement with the UK towards the end of the year. Vietnam has already become a key part of the global supply chain. Its trade volumes are around twice its GDP and further international collaboration is likely to stimulate its economy and growth in trade. According to Dynam, one of the key forward-looking themes in Vietnam during 2020 was the relocation of manufacturing from other countries globally (particularly from China) to Vietnam.

Like China, Vietnam uses a five-year planning cycle. At the end of every five-year period, the government assesses its achievements, outstanding matters and future priorities. In our opinion, this system benefits investors, who get a better understanding of forthcoming social, economic and political issues. Each five-year plan sets out a budget and related areas of expenditure.

In February 2021, the country entered the next stage of economic progression with a new five-year plan. It focuses on reducing corruption and market inefficiencies and encourages investment in domestic infrastructure.

Given this backdrop, Dynam Capital continues to pursue investment opportunities, capturing three mega trends in Vietnam by investing in listed companies. Two of these trends, industrialisation (c 33% of thematic exposure in VNH’s portfolio at end-April 2021) and urbanisation (c 17%) are directly linked to the government’s key goal of developing infrastructure. The third largest thematic exposure, consumer (c 11%), aims to capture growth in consumption by the middle class, as the economy grows and income per capita increases. As the Vietnamese population’s disposable income grows, they become more sophisticated consumers of goods and services as proportionately less of their income is needed for essentials like food.

The portfolio contained 28 holdings at end-April 2021 (22 holdings at end-April 2020), that is a few holdings more than the targeted 20–25 range. As shown in Exhibit 2, two major changes over the past 12 months were the increase in banks’ weighting (+14.5pp) from a low level (15.7% at end-April 2020) and a reduction in the retail sector (-8.2pp).

Exhibit 3 shows the two major retail positions that were reduced by the team: jewellery retailer Phu Nhuan Jewelry (-4.4pp) and mobile services giant Mobile World (-2.2pp). The Dynam team believes there will be an overhang in the retail sector from the COVID-19 economic crisis and resulting lockdowns. The sector is still overweight as it is a sizeable part of the consumer theme for Dynam, and the team retains conviction in the remaining retail holdings. Both holdings remain in the top 10 within the portfolio.

The team is currently upbeat about Vietnamese banks. Dynam points out that banks in Vietnam are more regulated than other industries, which forces them to adopt standards of best practice. This encourages them to maintain healthier balance sheets and operational resilience. The growth potential in the banking sector is vast, given the government’s current growth plans for the economy and e-commerce developments. We note that the team was underweight banks before 2020 which, coupled with the previous overweight position in retail, was one of the major reasons for the fund’s relative underperformance versus its two closest peers, and believe, it took courage to buy into them during the uncertainty of 2020. As it supplies businesses with capital, the banking sector is one of the key parts of the growing economy amid its demographic, industrial and urbanisation trends. This high-growth sector incorporates the three major themes that Dynam is pursuing.

Exhibit 3 illustrates that within the top 10 holdings in the portfolio 12 months ago, two of the banks, Vietnam Prosperity JSC Bank and Vietnam Joint Stock Commercial Bank, had their weights materially increased, by 6.5pp and 5.9pp, respectively. Saigon Thuong Tin Commercial (4.2% portfolio weight at end-April 2021) is a new addition to the portfolio’s allocation to banks.

The telecommunications and industrial sectors had their weightings reduced by 4.2pp and 3.9pp, respectively, as the team took profits from stocks that performed well and reinvested cash into banks and financial services (which increased by 6.8pp).

Anticipating lower growth potential from a number of sectors, including food & beverages, construction & materials, chemicals and utilities, the team allocates to each less than a 2.0% weighting. A small increase in construction & materials (+1.2pp) as well as chemicals (+1.1pp), represent the industrialisation and urbanisation trends.

Exhibit 4 illustrates a material improvement in relative performance over the past few months. VNH’s favourable positioning in relation to the cyclical market recovery has paid off. The top 10 holdings, including the industrial group Hoa Phat and two banks, Vietnam Prosperity JSC Bank and Vietnam Joint Stock Commercial Bank, to which the team added during 2020, drove the outperformance. While VNH does not have a benchmark, we have used two Vietnamese equity market indices for comparative purposes. The fund has outperformed the VN Index (385 members, the broader market index of the two) and the VN All-Share Index (259 members) over six months and one year by 9.2% and 6.3%, and 12.1% and 9.2%, respectively, on a net asset value (NAV) total return basis.

VNH still lags both indices over the period of Dynam’s tenure (from July 2018) and over the last three years. During FY19–20, VNH had a sizeable overweight position in the retail sector (18% at end-April 2020, reducing to 9.8% at end-April 2021, see Exhibit 2). The team held high-conviction names, which are still in the portfolio, albeit with reduced weightings, including Mobile World (MWG), Phu Nhuan Jewelry (PNJ) and retail-related Vincom Retail (VRE), as well as Thien Long Group (TLG, now sold) at a time when the retail sector was underperforming. VNH also held more smaller-cap companies in the portfolio, which underperformed the larger caps during that period (around 2018, the small caps traded at a discount of about 30% to the large caps). Following the addition of banks and a few other large-cap stocks, the portfolio is more balanced between small and large caps. In addition, the two tender offers since Dynam’s appointment potentially contribute to the fund’s historical underperformance. The team conducted a $40.7m tender offer in FY19 to restructure the fund (June year end, see our initiation note for more details) followed by another offer for c $19.6m in FY21. The company also bought back 0.5m shares (just over 1% of the share capital) during FY21.

During the last six months of FY20 and in early FY21, Dynam was gradually adding to banks and financial services, which performed strongly over these periods, while reducing poorly performing retail, in order to reposition the portfolio towards more cyclical sectors, which should support performance.

The portfolio is now well positioned to benefit in 2021 from its allocation to economically sensitive sectors like banks, industrials and retail, should the economy continue to perform well supported by the global cyclical recovery and ongoing domestic growth.

Exhibit 5 shows VNH’s discrete performance over the past five years, where Dynam is responsible for the last three. While this concentrated fund’s return was more negatively affected by the market slump in March 2020 than Vietnam VN Index and Vietnam VN All-Share Index, the fund bounced back well in 2021. VNH returned 57.4% on an NAV total return (TR) basis over 12 months to end-May 2021, outperforming the Vietnam VN Index by 2.0% and the Vietnam VN All-Share Index by 13.3%, demonstrating the fund’s strong alpha relative to these two indices.

Exhibit 6 presents the averages for the Vietnam peer group of three London-listed trusts. VNH’s market cap has grown materially from £75m (at end November 2020), as the fund has performed strongly over the past few months, and now exceeds £100m, but it remains the smallest among its Vietnam peers. This growth came despite the tender offer in November 2020 and the trust buying back 298,000 shares (£0.1m) over six months to end May 2021. VNH currently has 42.6m shares outstanding.

As the current manager was appointed in July 2018, the one-year NAV total return is still the most relevant, where it ranks second (by margin), sharing the top TR position with VEIL (up from third at end-November 2020). VNH’s stellar performance over the past three months and during May, in particular, boosted the one-year TR. If the recovery continues, higher exposure (relative to the benchmark) to banks and some other cyclical stocks, such as industrials, positions the fund well to result in sustainable outperformance to the indices.

VNH has a different mix of sectors, compared to its two peers, but all three funds currently have high exposure to cyclicals. VEIL is slightly more overweight banks (33% versus 30% for VNH, 27% for the VN All-Share index) and has more real estate (26% versus 16%, 25% for the index) in particular, while all other sectors are represented in VEIL at less than 10% (end-May 2021 portfolio). VOF’s highest weighting is in construction & materials (24% versus 1% in VNH, 4% for the index). VOF allocates a 20% weighting to financial services (including banks) and to the real estate sector.

While VNH’s ongoing charges are highest of the three funds (smaller funds tend to incur higher charges), in 2020 the board removed the performance fee for a 25bp increase in the management fee to 1.75% pa on NAV below $300m and 1.5% on NAV between $300m and $600m. The board notes that the initiative lowers the total expense ratio (TER) of the fund by c 80bp on a forward-looking basis.