The AFC Vietnam Fund returned −2.1% in October with a NAV of USD 1,805.80, bringing the return since inception to +80.6%. This represents an annualised return of +12.9% p.a. The Ho Chi Minh City VN Index in USD lost −10.1%, while the Hanoi VH Index lost −9.5% (in USD terms). The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.71%, a high Sharpe ratio of 1.40, and a low correlation of the fund versus the MSCI World Index USD of 0.27, all based on monthly observations.

Market Developments

In Asia alone, USD 5 trillion in net worth has been wiped out since the beginning of the year. While experts are trying to find particular reasons why the market has tanked, the reality is simple: leading stocks in the US were simply too expensive. Funny enough, people are now getting nervous and anxious after the correction has happened. Some experts looking for value in the market are pointing to the percentage losses in many of the leading stocks, especially investor darlings such as the FANG stocks (Facebook, Amazon, Netflix, Google) which are down around 20-30% from their peak. But does this correction mean these companies are now fairly valued? The only fact we really know is that current buyers are now buying much cheaper than others only a few weeks ago. We believe that it is much more important to own stocks of companies which are able to weather this storm. So far, value stocks are holding up much better than most others and also better than most stocks in the developed world. Once again, our AFC Vietnam Fund is proving effective in its low volatility in difficult markets.

Every investor should look for investments where he/she can sleep well without worrying too much and hence affecting the quality of their daily lives. Like so many times in the past, we are now seeing stock markets correcting 10-20% from their peaks and we think it is rather late to think of selling stocks which are trading at fair or cheap valuations. “Fair” or “cheap” are of course expressions which have different meanings to different investors. When a stock like Netflix loses 25% and still has a trailing P/E of around 100x (and a market cap similar to all 1,000+ stocks combined in Vietnam!), we would probably not sleep well owning that stock as it is still up 58% this year alone. Many investors could still cash in with the stock trading at valuations 400% higher than the average listed US stock (or 1,000% higher than our fund!).
Like many times in the past, the period from October to November is again very volatile, but at the same time it may be a good entry point into the market. It is always easy to listen to super bullish market commentators from “CNBC & Co.” in an uptrend and buy along with everybody else, instead of buying at more attractive valuations after a correction when “blood is on the street” as Mark Mobius, the Emerging Market veteran, just mentioned in a recent interview. Like us, Mobius again sees “value” in Emerging Markets, which makes sense, since valuations across Asian Emerging and Frontier Markets are trading at similar levels as a few years ago. It is interesting to note, when looking back at the leaders in technology stocks 10 years ago, that they have changed almost completely since then. In the future we might see stocks like Netflix still in the top ten, but in reality, it is anyone’s guess. However, if it remains a leading stock in the future it is likely to trade at a significantly lower valuation than today. More likely however is that in 10 years names like those that make up the FANG’s will not be as significant as they are today, given the fast-changing world of technology. On the other hand, we think Vietnam will grow at an impressive pace over the next 10 years. Whether the growth is at a rate of 5% or 8% on average is of secondary importance in that respect. Again, the total market cap of Vietnam today is equivalent to just one of those mega-caps!
The Vietnam Small Cap Index bottomed out on 29th October 2018 above its July 2018 lows, which means it outperformed the main index which tested its July 2018 lows on 29th October 2018 before gaining strongly on the last day of the month. This is a very positive sign as the index hit its high six months earlier than the blue-chip index.