The Vietnam Fund gained +2.9% in February with a NAV of USD 1,798.50, bringing the return since inception to +79.8%. This represents an annualized return of +12.0% p.a. The Ho Chi Minh City VN Index in USD gained +6.0%, while the Hanoi VH Index added +2.9% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.65%, a high Sharpe ratio of 1.29, and a low correlation of the fund versus the MSCI World Index USD of 0.26, all based on monthly observations.

Three of the top index components were almost solely responsible for the strong performance of the HSX index and the outperformance against everything else (sector- and index wise) in February, especially during the second half of the month. The market breadth was weaker over the past two weeks, but over the full month we saw gains on improving volume across the board.
Market Developments

Three big contributors of the index gains are related (the Vingroup family of companies) and were pushed up mostly by domestic investors, despite the biggest company, Vingroup, publishing a declining profit for 2018. Without any (good) news, this advance added USD 3 bln in market capitalization to these three companies and lifted their P/E ratios to 101x (Vingroup), 19x (Vinhomes) and 44x (Vincom Retail). If we exclude these 3 stocks, the market with its approximately 1,500 listed stocks and several indices would have been up by a more modest 3.7% in February.

Since most companies have already published their (unaudited) results, we would like to share our observations about the developments of earnings and valuations, especially in relation to our portfolio holdings. Back in our May 2018 interim report we showed the earnings valuation of our portfolio, divided into several groups. We updated the same overview since it provides an interesting comparison over this time frame given that the “market” is now only slightly lower than after the strong correction in April/May of last year. The “market” unfortunately often refers to the most popular index, the HSX index (Ho Chi Minh index), with some of its index constituents not open to foreign investors due to foreign ownership limit restrictions. On the other hand, the Hanoi index with its biggest index component, Asia Commercial Bank (having a 19% weighting and also not available to foreigners) is currently around 15% lower than in May 2018, along with the majority of stocks listed in Vietnam.

When we look at the 2018 earnings of the top 5 index components of the VN30 (an index which combines stocks from both exchanges) and which are weighted at around 60% in the index, we see that 2 out of those 5 companies had declining profits in 2018. That does not mean that the overall picture for earnings was very bad in Vietnam – actually the overall profit growth was estimated at 12-14% for last year – but it shows that “big” does not mean better and profit growth distribution is not homogeneous throughout the market in Vietnam.

The same can be said for the current valuation of the market, as it is far from normal that a country with two stock markets (or three if we count UPCOM as another separate market) has widely different valuations in terms of earnings multiples from 8.7x (Hanoi) to 16.6x (HCMC). It seems both domestic and foreign investors are still racing for the same stocks, echoed by the top 5 VN30 index components which currently have P/E ratios of 101x, 19x, 28x, 15x, and 16x and dividend yields of 0%, 0%, 2.8%, 1.3% and 3.1%.

On the other hand, our portfolio currently consists of 67 stocks, all of which are profitable and the majority of which are paying attractive cash dividends. All of our top 5 holdings were able to grow their ordinary profits last year and the overall valuation is very attractive as one can see from the graph below. The comparisons are from May 2018 when we had a few more stocks compared to today, as we exited a few, mostly smaller companies in recent months.