Vietnam Closed End Funds: Improving Outlook & Attractive Valuations (Numis)

Numis Securities has recently published a detailed research report on Vietnam closed-end funds, which are generally only available to European investors given their London and/or other European listings, that also covered ETFs like the Market Vectors Vietnam ETF (NYSEARCA: VNM) which is available to American investors. The report concluded:

In our view, the best way to access Vietnam is through closed-end funds (CEFs). There are currently nine CEFs in our universe with combined net assets of $2.8bn. All of these were launched prior to 2008 and benefit from experienced, locally based managers. NAV performance has generally been good, but the sector has continued to suffer from wide discounts. In our view this presents an opportunity to enhance returns. There have been significant improvements in corporate governance and portfolio transparency in recent years. In addition, most funds have introduced regular share buyback programmes, and corporate action is picking up, with both PXP Vietnam and Vietnam Infrastructure due to open-end shortly. On the downside, management fees are still high and trading liquidity is patchy for many of the funds, particularly for those traded solely on an OTC basis.

The Numis Securities report also outlined a number of key advantages with Vietnam closed-end funds (e.g. experienced management teams, a range of mandates, ability to invest in less liquid stocks, exposure to restricted stocks, valuations and corporate governance) along with some key disadvantages (e.g. lack of trading liquidity, lack of transparency, high fees and regulation) with particular scorn being heaped on high fees of some closed-end funds:

Despite some reductions, we believe that fees in the Vietnam CEF universe are still too high. 2% and 20% fees are no longer acceptable to many investors in listed funds. Following the Retail Distribution Review (RDR) in the UK, which abolished trail commissions, headline fees for clean share classes of open-ended equity funds are typically 0.75% pa or less. Funds with specialist mandates would be expected to charge higher fees, but there is now far greater emphasis on the level of fees in general. The fees of DWS Vietnam, in particular, stand out as being from a different era, in our view.

As for Vietnam ETFs like the Market Vectors Vietnam ETF, the Numis Securities report noted:

The difficulty is that trading liquidity and foreign ownership limits mean that it is not possible to track the performance of the Vietnam Index. Instead these ETFs follow indices that have been designed to facilitate tracking. As a result, they have no exposure to some of the largest stocks in the market (e.g. PV Gas and Vinamilk). This has impacted on their performance, and the ETFs have failed to match the performance of the Vietnam Index in recent years (or that of the CEFs).
In addition, the ETFs tend to have concentrated portfolios, and due to their size relative to the market, significant inflows/outflows can have a material impact on underlying share prices.

The whole research report, Vietnam Closed-End Funds: Improving Outlook and Attractive Valuations, is available on Vina Capital’s website. However and before you invest in Vietnam, check out: Apocalypse Now For Investors? A Vietnam Investment Review (And Reality Check)

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