The AFC Vietnam Fund gained 0.7% in October with a NAV of USD 1,894.66, bringing the return since inception to +89.5%. This represents an annualized return of +9.8% p.a. The Ho Chi Minh City VN Index in USD rose 2.3%, while the Hanoi VH Index gained 1.8% (in USD terms) in October 2020. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.85%, a Sharpe ratio of 0.69, and a low correlation of the fund versus the MSCI World Index USD of 0.54, all based on monthly observations.
Fighting against the headwinds of negative sentiment in international markets due to renewed COVID-19 fears, the virus-free Vietnamese market saw another month of gains, making for a three month long winning streak. The gains were mainly contributed by two stocks, whose combined impact was +3% on the index, while the broader market corrected sharply after recent strong gains (the small-cap index was down -6% in October!).
After strong gains in recent months, the broader market took a breather, but sentiment still continued its general positive trend. While the market breadth was weaker and gains were not as evenly distributed as before, we saw continued strength in many of our investments despite ongoing overall foreign selling. Meanwhile, MSCI announced an upcoming increase of Vietnam in the MSCI Frontier Market Index which was originally announced back in June 2019. The longer-term inclusion of Kuwait into the benchmark MSCI Emerging Markets index still looks set to go ahead, although it may be delayed again beyond November 2020. The stock market in Kuwait continues to meet all the necessary criteria for re-classification into the MSCI Emerging Markets Index which means it would be eliminated from the MSCI Frontier Market Index, leading to an increase in the weight of Vietnam to 28.76% from 12.5% currently. This is hardly real “news” and shouldn’t have a big direct impact in terms of foreign money inflow which would be expected in the range of USD 400-700 mln. As a comparison, when adjusted for a few special deals, the foreign outflow this year is more than USD 1bln, with the market strongly up in the past few months. However, traders always jump on the bandwagon when momentum builds up, like in this case, and this could provide some added tailwinds.
Vietnam 2013, 2020 and the years ahead
We can hardly believe it ourselves, but it has been 7 years since we decided to start our AFC Vietnam Fund. It was during a financial conference in Ho Chi Minh City where two of our initial founders attended because they saw tremendous value in the country’s development and stock market - and the idea of the AFC Vietnam Fund was born. Probably set up in record time for a fund in Vietnam, two months after this conference, on 23rd December 2013, the fund was officially launched.
For all investments it is always important to review if the original investment rationale still holds, such as its stock price appreciation potential, etc. After all, it is the future which counts when investing in the stock market, not the past. Only when an investor is able to look beyond his individual buying history can life-changing gains be possible. We know many people who made tremendous gains in companies like Apple, Google or Amazon by holding them over many years, but it is much more difficult to find people who made similar gains in trading the same companies over a lengthy period.
We have always seen Vietnam as the single best investment idea on a macroeconomic basis in South East Asia – the “Amazon.com of South East Asia” so to say, as Vietnam continues to take market share from other Asian nations. The growing importance and size of its economy makes it even harder for decision makers at international manufacturing companies to ignore the rising star of South East Asia. With our investment philosophy, where we try to invest in undervalued and less volatile companies, we still see continued potential for Vietnam over the next several years, and hopefully even decades. It is therefore also important to mention that our ownership (AFC staff and management) in the AFC Vietnam Fund continues to grow, as our fund manager adds every quarter to his holding in the fund. In other words, we still strongly believe in the enormous potential of Vietnam over the years to come and continue to have “skin in the game”.
We always believed and predicted that Vietnam’s low economic base with its huge amount of human capital (almost 100 mln people), many of whom are well educated and hard-working, especially in comparison to competing countries, has a long way to grow, similar to the path of China’s economic development 20 years earlier. After all, the country’s political, economic and social culture is probably best compared to China, even though Vietnamese do not like to hear this. We were all witnesses to the Chinese (economic) success story in recent decades and – while on a smaller scale – we are still in the beginning phase of a similar success story in Vietnam.
Even though the current numbers are impressive, with Vietnam already closing the gap with some of its main competitors within Southeast Asia in terms of GDP – and that relative outperformance should continue - one should not forget that Vietnam did not play any meaningful role in Asia just 20 years ago. Only after the global financial crisis of 2008, a shift of production from other countries into Vietnam accelerated and a very supportive economic policy from the government in Vietnam made sure that large amounts of investments were attracted to the country, while countries like Thailand and the Philippines spent their time and energy on internal politics.