The Vietnam Fund returned +0.4% in January with a NAV of USD 1,869.46 bringing the return since inception to +86.9%. This represents an annualised return of +16.1% p.a. The February performance of the Ho Chi Minh City VN Index in USD was +0.8%, while the Hanoi VH Index gained +1.5% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.78%, a high Sharpe ratio of 1.78 and a low correlation of the fund versus the MSCI World Index USD of 0.26, all based on monthly observations.

February was a very good example of why investors should not consider knee-jerk reactions when having a long-term investment view. Blue chips recovered all of their heavy losses from the first part of the month and the indices in HCMC and Hanoi ended the short Lunar New Year month with gains of 1.0% and 1.7% in local currency terms (the Dong ended approximately 0.25% weaker versus the USD), while small- and mid-caps recorded their biggest losses since October. As usual the Vietnam Fund was less affected by those high volatility index movements and also recovered from earlier losses, closing the month with a gain of +0.4%.

Market Developments

After the long Lunar New Year holiday the Vietnamese stock market bounced back along with others around the world. It seems that the once low correlation between Vietnam and leading markets in the US and Europe is history, at least for now. Financials and other index heavyweights are bought and sold by both index tracking funds and local investors at the same time. The rising risks for investors, described by elevated volatility over the past few weeks, is concentrated in the index stocks, while most mid and small caps remain neglected by investors as weak market breadth and low volume prevails.

The Vietnam Fund has always been much more stable in terms of price movements than the general market and this was especially so in February as it became obvious how short-term movements from global investors can affect so-called “safe” blue chip stocks in Vietnam. In the two day sell-off where the market fell 8.5%, many investors were not able to sell when prices were limit down (7% for HCMC Index, 10% for Hanoi Index).

On a mid to longer term view, the strategy of the AFC Vietnam Fund aims to reduce the risks which we are currently seeing in Vietnamese blue chips, namely increased volatility and high valuations. We are therefore investing in attractively valued stocks with low volatility. This has resulted in a high Sharpe ratio of around 1.8, despite the spike of the index in recent months. (The Sharpe ratio is a way to examine the performance of an investment by compensating for its risk. The ratio measures the excess return over the risk-free rate, divided by its volatility).

Throughout history investors have always looked for the highest possible gain in the shortest period of time. If that would not be the case, then there would never be any bubbles or overvaluation in the marketplace. Investor’s memories tend to be short lived. Not a very long time ago, people were afraid of holding cash in their bank accounts, not to mention investing in stocks or new financial instruments they hardly understood. Now, many people – once again – are back and looking for ideas that will generate 10% a month or more.

We have been a bit anxious about the developments over the past 6-12 months as the ultra-low interest rate environment around the world was a drug for investors over the past few years and is now at risk of being taken away by central bankers. Maybe even worse, it seems that not only investors have a bad memory about recent financial history, but also corporate managers, as they were very eager to add risk in return for higher profits in the short term by raising debt levels over the past three years to levels not seen since the outbreak of the global financial crisis less than 10 years ago.