The AFC Vietnam Fund lost −1.4% in January with a NAV of USD 1,764.06, bringing the return since inception to +76.4%. This represents an annualized return of +9.7% p.a. The Ho Chi Minh City VN Index in USD lost −2.7%, while the Hanoi VH Index lost −0.3% (in USD terms) in January 2020. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.52%, a Sharpe ratio of 1.02, and a low correlation of the fund versus the MSCI World Index USD of 0.25, all based on monthly observations.

The stock market in Vietnam had a very special start to the year. Lunar New Year began on 23rd January, shortening the number of trading days in the month. There was very little turnover in all market segments which was accompanied by a decline in the various indices in the first few days and especially in small caps which were under immense pressure. The Vietnam Small Cap Index lost more than 8% since Christmas, and from a technical angle now trades in tremendous oversold territory, which was in the past often a major turning point.

Mid-month, blue chips started to turn positive, mainly due to the strong performance of banking stocks, while mid-caps followed a few days later. This was followed by small-caps starting to bottom out just before the Tet holiday break. When markets continued trading after the holidays, a 5.5% plunge followed, after other markets around the world corrected in previous days on news of the Coronavirus 2019-nCoV. Vietnam reported only 2 infections as of 30th January, but the government closed the border to China temporarily and took other actions to reduce infection risks. Of course, we are also watching the developments and checking our portfolio, but with no direct exposure to the tourism industry, we see currently only a few companies very mildly affected, with other companies potentially even profiting from the current situation. That also shows in the performance of our portfolio, especially during the last two trading days, where our losses were very limited. However, all epidemics over the past decades had only a short-term impact on financial markets.

At the end of January 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.0%) – an insurance company, Vietnam Container Shipping JSC (3.9%) – a container port management company, Phu Tai JSC (3.8%) – a home and office furnishings company, Idico Urban and House Development JSC (3.6%) – an energy, construction, and real estate business, and National Seed JSC (3.0%) – a producer of agricultural seeds.

The portfolio was invested in 59 names and held 4.1% in cash. The sectors with the largest allocation of assets were industrials (32.8%) and consumer goods (29.7%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.57x, the estimated weighted harmonic average P/B ratio was 1.00x and the estimated weighted average portfolio dividend yield was 6.95%.

The AFC Vietnam Fund lost −3.9% in February with a NAV of USD 1,694.69, bringing the return since inception to +69.5%. This represents an annualized return of +8.9% p.a. The Ho Chi Minh City VN Index in USD lost −5.9%, while the Hanoi VH Index gained +7.0% (in USD terms) in February 2020. The broad diversification of the fund’s portfolio resulted in a low annualized volatility of 8.68%, a Sharpe ratio of 0.91, and a low correlation of the fund versus the MSCI World Index USD of 0.30, all based on monthly observations.

February started with a bang for Vietnamese stock markets. After initially losing almost 5% on the first trading day of February on high volume, the market soon calmed down and recovered before the markets fell for a second time in the final week of trading. The world has seen epidemics in the past and mostly, stock prices were only affected for a very short period, usually for 1 to 2 quarters. Of course, certain industries will be impacted more than others, as for example the tourism sector – such as air travel and accommodation – which always has been hit hardest during these epidemics/pandemics. But any dip in economic activity should be compensated for later in the year, as occurred during the SARS outbreak where the market regained lost ground within 2 quarters.

Our portfolio holdings are not directly affected by this crisis as we do not own aviation stocks or companies in the accommodation sector. Depending on the future path of Covid-19, the underperformance we have seen in the more affected countries could be regained in a relatively short period of time. Let’s not forget that the US markets just hit another all-time high mid-February and European markets were at multi-year highs recently, while Vietnam along with many other Emerging Markets are still much lower YTD and are already pricing in lower than expected economic growth this year, which currently is estimated at around 6%, down from 7% in 2019; although 6% would still stand out in comparison to global developed GDP growth forecasts.

At the end of February 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (5.9%) – an insurance company, Vietnam Container Shipping JSC (3.6%) – a container port management company, Idico Urban and House Development JSC (3.6%) – an energy, construction, and real estate business, Phu Tai JSC (3.5%) – a home and office furnishings company, and Sametel Corporation (2.9%) – a manufacturer of electrical and telecom equipment.

The portfolio was invested in 61 names and held 5.5% in cash. The sectors with the largest allocation of assets were industrials (34.5%) and consumer goods (29.5%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 7.17x, the estimated weighted harmonic average P/B ratio was 0.93x and the estimated weighted average portfolio dividend yield was 6.85%.

The AFC Vietnam Fund lost 18.4% in March with a NAV of USD 1, 382.27, bringing the return since inception to +38.2%. This represents an annualized return of +5.3% p.a. The Ho Chi Minh City VN Index in USD lost 26.1%, while the Hanoi VH Index lost 16.9% (in USD terms) in March 2020. The broad diversification of the fund’s portfolio resulted in an annualized volatility of 12.02%, a Sharpe ratio of 0.36, and a low correlation of the fund versus the MSCI World Index USD of 0.49, all based on monthly observations.

To nobody’s surprise, Vietnam joined other markets around the world in the biggest sell-off in recent decades and one of the biggest ever in history. Some of the world leaders are speaking of a “war against an invisible enemy”, and in fact the losses we see even in the biggest financial market, the US, are comparable to 1929, 1940 and the more recent global financial crisis of 2008. The biggest question has always been, how will Vietnam and other already beaten down Frontier and Emerging Markets react when the comparably expensive US markets correct, but nobody expected anything like what we have seen in recent weeks.

Many of our stocks were sold down heavily over the past few weeks and while we have consistently written about cheap valuations in our portfolio, one more important component in the investment world has now become very crucial – healthy balance sheets – one of our top investment criteria when choosing a company to invest in. Nobody knows the duration of this crisis, but it will make a huge difference for the survival of many businesses over the next few quarters. We own many companies with net cash able to survive even if their business operations have to close for even several quarters, although the outlook does not look that grim which hopefully will be reflected in the first quarter business results which will be published next month.

At the end of March 2020, the fund’s largest positions were: Agriculture Bank Insurance JSC (6.0%) – an insurance company, Idico Urban and House Development JSC (3.8%) – an energy, construction, and real estate business, Vietnam Container Shipping JSC (3.7%) – a container port management company, National Seed JSC (3.0%) – an exporter of seeds, and TanCang Logistics and Stevedoring JSC (2.6%) – a logistics company.

The portfolio was invested in 61 names and held 8.9% in cash. The sectors with the largest allocation of assets were industrials (34.0%) and consumer goods (26.7%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.90x, the estimated weighted harmonic average P/B ratio was 0.75x and the estimated weighted average portfolio dividend yield was 8.97%.

Sources: Bloomberg, Asia Frontier Capital

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