The Vietnam Fund returned +4.5% in June with an NAV of USD 1,867.93, a new all-time high, bringing the net return since inception to +86.8%. This represents an annualised return of +19.4% p.a. The June performance of the Ho Chi Minh City VN Index in USD was +5.2% while the Hanoi VH Index gained +5.5% (in USD terms). Since inception, the AFC Vietnam Fund has outperformed the VN and VH Indices by +45.0% and +51.9% respectively (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.87%, a high Sharpe ratio of 2.16, and a low correlation of the fund versus the MSCI World Index USD of 0.30, all based on monthly observations since inception.
June was another strong month and stocks across the board continued to rise, bringing the main index in HCMC to a new multi-year high. The financial sector in particular was strong, while small- and mid-cap stocks caught up later during this rally.
The market continued its strong upward move over the month of June. However, looking longer term, in order to better understand the future potential of Vietnamese stocks we need to dig deeper and look into recent developments of various sectors and market trends.
Over the past few weeks we refrained from investing in some stocks which performed quite nicely, even though they are loved by analysts and foreign investors. In our view, they are simply overrated and expensive, and hence have vastly underperformed the market over the past several years. On the other hand, we identified a large number of extremely undervalued small cap stocks a few years ago which were performing extremely well between 2012 and 2014, but then “only” went up in line with the general market. Of late it has been interesting to note that quite a few of these stocks have traded limit up on certain days over the past few weeks, which is a rather rare event since this hasn’t happened for a very long time. If we look at the market breadth of the past three months, we finally see a strong recovery in the net number of advancing stocks. Looking further back, we see that this is hopefully only the beginning of a longer-term trend of a broad market rally.
With strong gains seen in recent months some people are concerned that the markets got ahead of themselves and could offer only limited upside potential in the near future. In reality, we were expecting Hanoi to finally break out of its long-term consolidation phase, having written about it on several occasions. Despite the recent index gains, we are now only 10% above the highs of 2014, while still trading more than 70% below the market peak of 2007! It is true that the headline valuation of the market has almost caught up with other markets in the region, but that has mainly to do with a rally in a few expensive and heavily weighted index stocks. With our portfolio still valued around 10 times earnings and with quite a few newly added and inexpensive stocks, we see plenty of upside for both the near and long-term.
Vietnam is now seen as one of the growth engines of Southeast Asia and we certainly agree. Over the next 10-20 years, the country will simply catch up with other economies in the region as Vietnam opened up much later. Some of the drivers of this will certainly be Vietnam’s much better educated, motivated and younger workforce. Another example is the growing tourism sector which was not considered as important in the past.