DRAGON CAPITAL VIETNAM DEBT FUND REVIEW

As inflation is a hot topic in global markets this year, let’s take a look at how this might affect the prospects of investing in a Vietnam debt fund.

There are not many ways to achieve such exposure in your portfolio, but arguably Vietnam’s most highly regarded fund manager does have a debt product out there.

Before I discuss the Dragon Capital Vietnam Debt Fund, it is worth noting some of the history of Dragon Capital.

HISTORY OF DRAGON CAPITAL VIETNAM

Dragon Capital formed in way back in 1994 with a team of six in Ho Chi Minh City.

In 1995 they launched the Vietnam Enterprise Investments Fund Limited (VEIL). That makes it the original and longest running fund in Vietnam. This fund is still powering on successfully as I write today. You can read about my summary of this particular fund in the link coming up below, where I wrote about three successful Vietnam listed closed end funds.

VIETNAM ENTERPRISE INVESTMENTS FUND LIMITED (VEIL) REVIEW

It is a high-quality vehicle that makes a lot of sense to use to get exposure to the Vietnam stock market.

BEST VIETNAM CLOSED END FUNDS (CEFs) ON THE STOCK MARKET? – VIETNAM STOCK MARKET (vietnamesestockmarket.com)

Now let’s get back to turning our attention to the debt fund that this successful fund manager, Dragon Capital, decided to launch almost 15 years ago.

ABOUT THE DRAGON CAPITAL VIETNAM DEBT FUND

It was in 2008 this fund launched, making it the first dedicated fixed income fund focused on Vietnam’s local currency debt market.

It has a unique mandate that investors should note that it can invest up to 35% in other Asian currencies, or 100% in cash in OECD currencies.

For those that might be unfamiliar with key aspects of Vietnam’s debt markets, it is best to start with my past overviews I provided below. That should give you some good perspective when continuing to read further down some of the key objectives and features of the Dragon Capital Vietnam Debt Fund.

VIETNAM BOND MARKET OVERVIEW

I made an overview of Vietnam’s debt markets by breaking things down into government and then corporate bonds respectively in the below 2 links:

OVERVIEW OF VIETNAM BOND MARKET – THE COMPLETE GUIDE – VIETNAM STOCK MARKET (vietnamesestockmarket.com)

OVERVIEW OF VIETNAM CORPORATE BOND MARKET – VIETNAM STOCK MARKET (vietnamesestockmarket.com)

KEY FEATURES AND SUMMARY OF DRAGON CAPITAL VIETNAM DEBT FUND

Below is a summary of the Dragon Capital Vietnam Debt Fund.

Objective – As per the fund manager’s website it states “The Fund seeks to generate, through active management, reasonably stable and high returns without taking excessive risk, within the context of the Vietnamese fixed income market.

VDeF’s investment performance relies on using proprietary credit and economic analysis to identify attractive securities and strategies. It aims to achieve a gross return equivalent or better than three out of four reference indices the DC liquid bond index and 1-year, 2-year and 5-year VGB indices and pays annual dividends which reasonably reflect its performance.”

Size – $USD 32 million.

Inception Date – December 2007

Base Fee– 1% per annum (monthly in arrears).

Performance Fee – 10% on excess of 3 month’s Libor + 3%, compounded annually with a high-water mark.

Subscription / Redemption Fees – Potentially 2% each way, although at the discretion of Dragon Capital.

Yield – refer earlier above to the general aim to pay annual dividends which reasonably reflect its performance.

Performance – Refer below, note data is quite stale being as at August 2021, but does cover a long time period.

Source: dragoncapital.com

MY THOUGHTS GENERALLY ON INFLATION AND THE VIETNAM BOND MARKET

Putting aside for one moment the risks of rising global inflation in 2022 to also show up in Vietnam, I thought I would refer to a chart to at least point out that Vietnam’s starting point is healthy.

Remember we are simply adjusting the interest rates here by the level of inflation.

Source: VinaCapital 2022 Outlook via YouTube presentation

Looking at the chart above, as we began 2022 Vietnam’s inflation was fairly well under control. Unlike many other places in the world, including various other emerging market countries, Vietnam at least had positive real interest rates.

That is usually a better sign to start with if looking to invest in a particular country’s bond market.

Even when we lookout at developed markets in the world the level of real interest rates can be quite worrying, think about the US at the moment with their high CPI prints. They are running highly negative real interest rates!

CONCLUSION ON IS THE DRAGON CAPITAL VIETNAM DEBT FUND A GOOD INVESTMENT?

I should note that this fund is not for the small-time punter with minimum investment stated at USD $100,000. Nonetheless even if it is out of reach for many, I thought all investors with Vietnam stock market exposures might be interested to learn some more aspects about other asset classes such as bonds and also more about Dragon Capital.

The subscription / redemption fees and nature of the asset class also mean this should be considered only as an investment for the long term.

Size wise the fund looks a little subscale which results in higher management expense ratio than they would like, and Dragon Capital has stated they have a target size much larger.

Like how they have been clearly successful with their long running equity product in VEIL, they so appear here to have demonstrated some clear added value in the Vietnam bond market space. A global investor has probably returned more than 9% a year over a long time period with this product if they got in near inception date. Whilst it may not sound like much to investors used to looking at the S&P500 returns over the last 10-15 years, we are dealing here with bonds remember.

When I look at the long run growth chart of their performance the relatively low volatility to equity markets means on balance it is delivering on the objective. As I noted above earlier i.e., “reasonably stable and high returns without taking excessive risk, within the context of the Vietnamese fixed income market.”

There does appear to be clear alpha generation after fees in terms of the benchmarks they cite.

Just to be clear though as noted above the info I came across on the product is a bit stale and I drafted this article a month or two back. As you may be aware, markets have been quite volatile which includes many global bond markets being under pressure. Readers therefore should try and do their own research if they want to come across more up to date information and learn more about the product.

INFLATION RISKS IN VIETNAM?

Therefore for those seeking exposure to Vietnam’s debt markets it may well be a good option. I guess the bigger question is whether now is a good time to seek such exposure?

At the present time I personally would be a bit concerned with overall inflation risks and how that could affect other investor’s appetite to all sorts of fixed income products out there. From that perspective I doubt I would be looking at this sort of investment right now.

Credit spread risks may also be of concern given the increased volatility in markets in 2022, and the fragility of the global growth environment.

However should such inflation jitters cause this asset class to cheapen up, well then it seems reasonable to look at this sort of product in the future as a potential opportunity again.

Is Vietnam a good investment?

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Thanks!

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