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The Vietnam Fund gained +1.5% in November with a NAV of USD 1,853.86, bringing the net return since inception to +85.4%. This represents an annualised return of +17.0% p.a. The November performance of the Ho Chi Minh City VN Index in USD was +13.5% while the Hanoi VH Index gained +9.1% (in USD terms). Since inception, the AFC Vietnam Fund has outperformed the VN and VH Indices by +11.9% and +29.3% respectively (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.96%, a high Sharpe ratio of 1.86, and a low correlation of the fund versus the MSCI World Index USD of 0.28, all based on monthly observations since inception.

November 2017 will be probably remembered as the “craziest” month in Vietnam’s relatively young stock market history. Government auctions for leading companies, such as Vinamilk (a rather small placement of 3.33%) and Sabeco among others, got attention from financial and strategic investors which led to extreme gains in those stocks, which are index heavyweights. While the government was not able to place all of their offered Vinamilk shares last year, they were able to sell them last month at a 30% higher price. Vinamilk is the stock with the highest weighting in the HCMC Index being 10.8%. The VN Index therefore rallied +13.5% last month. The Hanoi index was also able to gain substantially with +9.1%, while the market breadth only improved in the last few days of the month.

Vinamilk and the effect on the Index

The highest weighted stock in the Ho Chi Minh City Index, as well as in many other Vietnamese and frontier market indices, Vinamilk (VNM) had an amazing run in November which helped push up the benchmark Index by +2.5%. The stock soared +23.6% in November from VND 151,000 per share to VND 186,700 per share. The market capitalization of Vinamilk therefore reached USD 11.9 billion. The reason for that unusual jump was the USD 1 billion investment of Singapore based Jardine Cycle & Carriage (JCC) – a subsidiary of Jardine Matheson. Not the investment itself, but the aggressive way the buying took place surprised the market participants and resulted in a short-term rerating of the stock. The story actually started back in December 2016, when the Vietnamese government announced their intention to divest a 9% holding of Vinamilk, equivalent to 130.63 million shares. At the time, the initial offering price was VND 144,000 per share compared to a market price of VND 135,000 per share. The interest at that price was very modest with only 60% of the total shares offered sold. Fast forward to early November 2017, or just 11 months later, and the government announced their intention to divest another 48.33 million shares, equivalent to a 3.33% stake in Vinamilk. This time the market price was VND 151,000 per share, while the minimum bid price for the 3.33% stake was set at VND 151,200. JCC ended up taking all 48.33 million shares offered at VND 186,000 per share; equivalent to a hefty 23% premium to the offering price (other offers were around VND 155,000!). In other words, JCC paid USD 73 million more than the minimum buying price – a pleasant gift for the government of Vietnam. Furthermore, JCC continued to increase its stake to more than 10% by buying more shares on the open market. After that news was disclosed the market price closed the gap, but one has to ask himself why did JCC show no interest last year at a price which was 23% lower?

Other important investments where JCC holds 20-25% include Siam City Cement of Thailand and REE of Vietnam, a company we also hold in our fund and where JCC just announced their intention to raise their stake to 24.99%.

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