So you have made the decision to allocate some money for exposure to the Vietnam stock market, just pick the first low cost ETF is the logical way to go right?
I do not necessarily want to say that will be a bad strategy right now. I simply want to illustrate that whether you choose this option, or go with various other Vietnam fund options, can come up with dramatically different investment success outcomes. This has been quite apparent whether that be over the very long term, or even just looking back over the last 12 months, or the last quarter for that matter.
You can generally expect large ETFs to hold larger stocks, which therefore poses an interesting question at the moment. Do cheaper Vietnam stock market valuations currently exist at the smaller or larger end of the stock market?
Let’s first explore about how dramatically different returns on various Vietnam fund choices can occur over all sorts of timeframes.
Whilst it has been quite topical over the last year or two about a booming Vietnam share market, some may be surprised to learn that one of the most popular ETFs there is showing a negative since inception performance number.
review of vnm etf performance to 2021
Without making this entire blog post about the VNM ETF, (I might do a specific review of this ETF at a later date), I think it is worth highlighting a few points. (I also realise this ETF owns many Vietnam exposures via other markets like South Korea, also a topic I will save for another day).
- The nature of an ETF like this is that it is designed to follow a basket of larger stocks. ETFs must be able to cope well with liquidity, whether that be dealing with a sudden wave of redemptions or surging inflows. Designing a product with larger more liquid names helps this and helps position the ETF to grow in size.
- If at one point in time stock market valuations appear far more expensive in the larger more liquid sections of the market, such an ETF can not reposition accordingly. It will keep doing what it says on the tin, i.e. stick to the size and liquidity requirements specified in the PDS no matter how relatively expensive they may appear.
- Some stocks will only appear in the common Vietnam stock indices these ETFs track, well AFTER other active fund managers have identified them and been shareholders for years. Sometimes such fund managers bought them when they were considered small cap or even unlisted stocks.
Now let’s examine the latest VNM ETF performance report.
I noticed in the latest VNM ETF report that Hoa Phat Group (HOSE:HPG) made it to the 5th largest holding. It is not far off being the top holding though so who knows it may get there soon as I have noticed this stock do well of late.
Contrast to around a decade ago, if you look up the 10-year share price chart of Hoa Phat Group (HOSE:HPG) you can barely see the line where it is at in 2012 because it was not a prominent stock within popular Vietnam share market indices at the time. If you examine the VNM ETF top 20 holdings back in 2012 Hoa Phat Group is unsighted, being way too small to be included at that time.
Whereas the closed end fund I personally own, VinaCaptial Vietnam Opportunity Fund (LSE:VOF), had Hoa Phat Group as one of their key top holdings for discussion in their 2012 Annual Report. All the way back in 2007 it was already a key holding for their fund being discussed, that is even before the stock went from private equity stage to being listed. In fact, entering stocks at the PE stage seems to be more the norm than the exception for VOF.
VIETNAM CLOSED END FUNDS (CEFs) vs VIETNAM ETFs
Obviously I am cherry picking some selective data to tell a story. However it is not a case of cherry picking in the context of noting that the VNM ETF has struggled to do well since its inception, that is simply a fact. I can’t help but think one factor would be that they can’t take advantage of these PE deals. They get lumped with the stocks sometimes after their big spurts of growth has just occurred, that is when the ETF sometimes starts buying. Or maybe after a highly promoted IPO hits the secondary market is when an ETF can start their buying, which is sometimes also after the big growth period.
Or the other issue about it has been a disadvantage that the ETF doesn’t hunt the smaller companies amongst the Vietnam stock market listings. I thought therefore I would check some numbers on some Vietnam small cap benchmarks to see how they have been going of late.
VIETNAM STOCK MARKET INDEX PERFORMANCE – SMALL VS LARGE
What is the MSCI Vietnam Small Cap Index?
The MSCI Vietnam Small Cap Index is designed to measure the performance of the small cap segments of the Vietnamese market. With 29 constituents, the index covers about 14% of the Vietnam equity universe.
Now how about larger Vietnam stocks..
What is the MSCI Vietnam Index?
The MSCI Vietnam Index is designed to measure the performance of the large and mid cap segments of the Vietnamese market. With 21 constituents, the index covers approximately 85% of the Vietnam equity universe.
Now let’s get back to my initial questions at the start of this blog post. How can your performance differ depending on if you go with various Vietnam ETFs / funds, or allocate in small or larger stocks?
Over the last decade it seems the small cap index above has done more than 3% better on an annualised basis.
In the shorter term over the last year, and noticeably in the last quarter, smaller Vietnam stocks have been the better place to be. Using these indices as a guide, small stocks climbed a massive 91% vs 44% for the large / mid cap index. VNM ETF has made a respectable 31% nominal return in the last year but doesn’t look very good in this context.
OTHER VIETNAM ETF PERFORMANCE PROBLEMS?
I alluded to this issue in a recent blog post (link just below) of mine where I discussed the topic of Vietnam stock market ETFs listed in Vietnam, compared with the foreign listed products.
VIETNAM STOCK MARKET ETFs – COMPLETE GUIDE TO LIST OF VIETNAM ETFs
I believe this should be the ultimate complete list of Vietnam stock market ETFs. There have been many new ones pop up in the last couple of years, so the below link provides an updated full tabled guide of all Vietnam stock market ETFs.
What I didn’t cover though is some of the recent performance differentials. I just mentioned the lackluster results of VNM ETF of late, now let’s look at the largest Vietnam listed ETF below.
WHAT IS THE PERFORMANCE OF THE VIETNAM DRAGON CAPITAL DIAMOND ETF?
Source: Dragon Capital
Over the last 12 months this is another type of an example of a prominent Vietnam fund that has almost doubled their money.
Which again emphasises the point I was getting across in that Vietnam ETF comparison post. The Vietnam Diamond ETF focuses on the stock that foreign investors often are forced to pay a premium on when trying to buy stocks where the foreign ownership limit is full. In other words, the stocks not so accessible to the foreign listed Vietnam ETFs that are better known to most investors.
Now how about a fund that specifically has a bias to target more of the smaller companies listed in Vietnam?
WHAT IS THE PERFORMANCE OF ASIA FRONTIER CAPITAL VIETNAM FUND?
This is another example of a Vietnam fund product doing substantially better than larger Vietnam stock indices over the last 12 months.
Source: Asia Frontier Capital
Perhaps the more important point is to think about those longer-term numbers as since 2013 is getting to a reasonable time frame to pass some sort of judgement. The 17% per annum since inception numbers they have is very respectable.
CURRENT VIETNAM STOCK MARKET VALUATIONS – SMALL VS LARGE CAPS
The tricky thing now is that as I started this blog in June this year, my strong suspicion was there could be a good opportunity in some of the smaller sections of the Vietnam stock market. If you read back to my initial posts that was one of my goals, to investigate ways potentially to play this. For example, should I open up a Vietnam stockbroking account directly or maybe even invest in something liked the AFC Vietnam fund above?
The bad news is I feel like some of this opportunity has passed me by very quickly. I see that in Q3 the AFC Vietnam fund has gained about 11% whilst the VN-Index actually fell by almost 5%!
The good news I suppose is some of my thoughts were vindicated, but who cares if it doesn’t show up in my wallet!
Given this great run in Q3, in the shorter term I would be a bit cautious on targeting smaller Vietnam stocks vs larger. Longer term though I do note the AFC Vietnam fund’s strong record. I also see that with the indices tables I placed above, the price to book measures indicate some relative cheapness still within Vietnam small cap stocks.
VINACAPITAL VIETNAM OPPORTUNITY FUND DISCOUNT
Gun to my head though if I was looking to add further Vietnam stock exposure right this minute, I have noticed that the VinaCaptial Vietnam Opportunity Fund (LSE:VOF) surprisingly was trading at a large discount the other day. I noticed a discount of over 22% whereas I see the other two Vietnam CEFs at 15% which is closer to their usual discounts in recent times.
I can’t think of why the discount widened a bit lately, I was expecting to see the discount at 15% or perhaps narrower. If anyone has some theories let me know in the comments section. I wonder if some have issues with the fund letting their position in Hoa Phat Group (HOSE:HPG) be very concentrated as I think it might be getting even close to 20%.
I don’t mind personally in the context of I look at what the effective exposure such a large weight would mean as a percentage of my investable assets by owning VOF. That way it seems quite fine and I also discussed briefly Hoa Phat group in a recent blog post of mine. It should be spitting out plenty of dividends eventually as I discussed here..
WHAT ARE THE BEST DIVIDEND STOCKS IN VIETNAM?
I expect the likes of Hoa Phat Group (HOSE:HPG) and VinaCaptial Vietnam Opportunity Fund (LSE:VOF) to be reliable dividend paying stocks in the future.
Finally, I thought it would be useful to finish this post by just recapping what are the largest companies in Vietnam for those that may be unaware.
WHAT ARE THE LARGEST COMPANIES IN VIETNAM BY MARKET CAP?
Below is a usefully summary of the top ten largest companies in Vietnam by market capitalization with some brief notes about what each company does.
Is Vietnam a good investment?
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