Investors seeking powerful macro themes to super-charge their portfolio could do a lot worse than look at the growth drivers that helped Vietnam become “the fastest country in history to move out of poverty”, according to VinaCapital’s Khanh Vu (pictured).
Data from the UN shows that the poverty rate in Vietnam fell from 58 per cent in 1993 to less than 10 per cent today. This has been aided by an economic transformation, with its stock market going from just two companies when it opened in July 2000 to about 400 today
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Vu, deputy managing director of the VinaCapital Opportunity trust, said that it is Vietnam’s demographics that continue to make it such a compelling destination for investors.
“Think of it this way,” he said. “There are very few countries in the world that have a population of 100 million. And importantly, 65 per cent of the population is under 35. That is an incredibly productive workforce, you can imagine that still has 15 to 20 years of productivity left.
“So that runway for growth, moving through poverty to low income to middle income. There is a huge runway for opportunity there.”
It is the theme of this growing middle class where Vu is focusing his efforts. High GDP growth – a figure of between 6.5 and 7 per cent has been forecast in Vietnam this year – means an estimated 30 million people are expected to enter the middle class in the next five years, equivalent to half the population of the UK.
Source: VinaCapital
This has implications for a whole range of sectors – for example, one-third of the portfolio is in food producers, with Vu pointing out the growing uptake of refrigerators will transform consumption habits, particularly for perishables such as dairy.
However, it is the education and healthcare sectors that have really piqued Vu’s interest.
“Education, in particular, is very important, it is your way of rising above what your generation and previous generations have been suffering, so it is key,” he explained.
“The situation with public healthcare in Vietnam is far more dire than in the UK. We have world class doctors, but the level of care and service you’re now looking for as you become middle income is just not there.”
Duong Vuong, another deputy managing director on the trust, expanded on Vu’s point: “In the UK you have got the NHS, and while you may have waiting lists, when you get to hospital, you don’t share a bed with someone else.
“But that is literally what Vietnam is doing. Sometimes they have to have two or three people sharing one bed. The sickest or weakest will be on the bed, there will be another one down the bottom, the family will be in the corridor sleeping while they wait for their brother, sister or parent.
“While we have very good doctors in the public system, they don’t have the capacity and the facilities to take in more patients. So that is why healthcare is one of the fastest growing areas in Vietnam.”
Source: VinaCapital
Vu and Vuong look for three elements in particular when considering a potential holding: a growing sector, which is typically domestically focused; a strong management team; and high standards of corporate governance.
The managers have a private equity-like approach, taking meaningful stakes in each company and acting like partners once they are invested. Approximately 90 per cent of the investments are in unlisted companies, although 80 per cent of the trust's holdings are currently trading on the stock market, with most having floated since they bought in.
Vuong said that when it comes to negotiating this type of deal, it is an advantage that both managers are Vietnamese.
“Not having a language barrier helps because a lot of businesses and people in Vietnam are more comfortable conversing in their own language and it is difficult to translate certain terms into English,” he explained.
“Although we are a foreign fund [listed in the UK], we are deemed to be local because we have been there for so long, so the business leaders treat us as though we are one of them rather than someone from outside coming in, so that definitely helps.”
However, perhaps even Vuong underestimates the extent of the culture gap. When describing the level of detail he goes into when carrying out due diligence on company management teams, he said, unprompted: “Before we do a deal we check out their wives, you know sometimes they have got a girlfriend – are they likely to move abroad?
“Some of these quite rich people, are they there for the long term or do they just get the cash, stay for a year and then go off to New York or London?
“We tend to partner with business people who have been in business a long time, so they are not just Johnny-come-lately kind of people.”
In a recent article on FE Trustnet, Mike Kerley, manager of the Henderson Far East Income trust, said foreign ownership limits in Vietnam led him to use the VinaCapital Vietnam Opportunity trust for exposure to the country.
VinaCapital Vietnam Opportunity has made 534.2 per cent over the past 10 years compared with 160.98 per cent from the MSCI Vietnam index. However, it has a maximum drawdown of 81.67 per cent since launch.
Performance of trust vs index over 10yrs
Source: FE Analytics
The trust is trading at a discount of 17.24 per cent to net asset value (NAV) compared with 18.52 and 19.94 per cent from its one- and three-year averages. It has ongoing charges of 1.8 per cent and is not currently geared.