The Vietnam Fund lost -0.9% in April with a NAV of USD 1,862.77, bringing the return since inception to +86.3%. This represents an annualised return of +15.4% p.a. Starting as a consolidation at the beginning of the month, April turned into a fully-fledged correction which took many investors by surprise. The so-called blue chips got hammered from their top on 10th April as the Ho Chi Minh City VN Index in USD lost -10.4%, while the Hanoi VH Index shed -7.3% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.67%, a high Sharpe ratio of 1.71 and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.
Despite the correction in the indices, we still saw good support in many of our portfolio companies’ share prices, even during the weakness in April, which helped us to outperform the indices by a good margin. As we are also holding several positions in cheaper, larger stocks which were affected by the general market downturn, the fund was not completely able to escape this sell-off.
We are never happy when we are losing money, but putting things into perspective, a monthly loss of 1% in a frontier market like Vietnam is not an extraordinary event. On the other hand, a more dramatic move of 10%, like we have seen in the index in April and on a few other rare occasions over the past years, is certainly something we hope to avoid now and also in the future with our much less volatile and well diversified portfolio. As we wrote in previous reports, the index gains in 2018 which were driven by only a few stocks were unsustainable. Many of those high-flying blue chips lost 20% in April and some are even off 30% or more from their peaks earlier this year. In our view, a recovery rally should be imminent sometime during May, but valuations in most of these companies are still far away from what we would consider as value. Prices in the first three months of the year were driven by ETF inflows multiplied by domestic retail momentum players, and now this source has simply dried up.
Like in most cases when bubbles burst, the reason is often not clear, but we are happy to see that the markets are correcting their most recent excesses, not only in Vietnam. We could see this correction in blue chip stocks continuing for some time to come, but this is also an opportunity for small- and mid-caps as investors take profits in expensive large caps and possibly switch into attractively valued mid- and small cap stocks. On days like we saw in April when all indices were falling 3% or more per day, of course there was also no hiding in mid-caps, but on other days these stocks where shining and nicely outperforming overpriced index heavyweights. Interestingly, the market breadth was not much weaker in April than during previous months when the index (or better said, some index stocks) were rallying, combined with a weak advance decline ratio. It is also worth noting that with ongoing new listings and the current correction, a few of the larger stocks are popping up on our value horizon, while at the same time, we continue to explore exit opportunities for some of our smallest positions in terms of company and position size as they have shown decent performance in recent years.
One of the arguments for the current weakness in emerging markets is the turnaround in global interest rates. The 3% mark in the 10-year US treasury bond was seen by many as a reason to be concerned about emerging markets and also Vietnam with the growing number of index trackers. While there was a closer relationship between interest rates and performance of emerging markets many times in the past, a level of 3% for long term interest rates is rather low in a historical context and can also be seen as normalization, ending the emergency actions initiated by central banks around the world after the financial crisis almost 10 years ago. Therefore, we are not really concerned about any significant impact on Vietnam, unless we were to see a fast rise to 5%.