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Vietnam: A frontier market for investors with an appetite for risk



By Dian Vujovich
Special to the Daily News

Investment professional: 'Vietnam is sort of a mini-China.

Frontier markets. For investors with an eye for spotting opportunities and a penchant for taking risks, pre-emerging markets can bring rewards. Dotted around the globe, even the smallest of these can pay off for investors willing to temper their risk fears with the hope of financial rewards.

Take Vietnam, for instance. It's a hot frontier market right now, and one portfolio manager, with a decade of investing experience there, sees a bright future for this country of 90 million.

There isn't a baby boomer around who isn't familiar with Vietnam. After all, some 58,000 American lives were lost in a war there that began in the late 1950s and ended in 1975. The memories aren't sweet. But that was then.

Today, the country is a growing powerhouse on a number of fronts. It's home to a youthful population -- 60 percent are under the age of 35 -- and boasts a literacy rate of 95 percent. Globally, Vietnam ranks No. 1 in rice exports, second in coffee exports and third in natural rubber exports.

Plus, its coastline offers some of the finest beach resorts in the region. In other words, the Vietnam of today is not your grandfather's Vietnam.

"Vietnam is sort of a mini-China," says Kevin Snowball, chief executive officer of PXP Vietnam Asset Management. "It has a large, well-educated population and a lot of natural resources." And the country is no slouch when it comes to exports. Its largest exports are garments, footwear, crude oil and electronics.

Snowball spoke recently at the Emerging Market Investment Summit at the Ritz-Carlton. No stranger to The Socialist Republic of Vietnam, (Vietnam's official name), in addition to living there for more than a decade, Snowball is the co-founder of PXP Vietnam Asset Management Limited, which was established in 2002. He also manages the company's two equity funds: the PXP Vietnam Fund, a closed-end fund, and the PXP Vietnam Emerging Equity Fund, an open-end fund.

There are two stock markets in Vietnam: the Ho Chi Minh Stock Exchange and the Hanoi Stock Exchange. Although the Hanoi exchange has more stocks listed on it, more than 400, most represent small-cap companies. The Ho Chi Minh market has more than 300 companies listed, most larger-cap companies, and is home to the Vietnam Index.

Below is more from Snowball about investing in Vietnam, as well as information about some of the equity holdings in the two PXP funds he manages.

Question: There are two stock markets in Vietnam. Which is the most widely followed?

Answer: The Ho Chi Minh Stock Exchange is the most widely followed. The market cap there is roughly four times that of the companies listed on the Hanoi exchange.

The Vietnam Index is the index of the Ho Chi Minh Exchange and is the simple market cap weighted average of every stock listed in Saigon. So that's the one that people watch. (It's also the market he refers to.)

Q: When did the stock market in Vietnam open?

A: It opened in 2000, but in 2000 there were two listed companies. When I got to Vietnam in 2002, that were 14 (companies listed), and when we started our first fund, (PXP Vietnam Fund) at the end of 2003, there were 22.

But it wasn't until after the current prime minister came to office for the first time in 2006 that the world discovered that Vietnam had a stock market.

That's about the same time that Vietnam appeared on people's radar screens -- Everybody in those days wanted emerging market investments. So, there was a huge wave of money that came into the market in 2006 and early 2007. Then, it (money coming in) came to a grinding halt.

Q: Why?

A: Essentially, the government started talking about introducing currency controls -- which never actually went through. But that frightened people and then they started looking at the fundamentals of the market. In March 2007, at the market's peak, it was trading at about 35 times earnings or higher. So everybody that could ran to the door.

Then in 2008, Vietnam had some very severe macro problems of high inflation and a weak currency. Both recurred again back in late 2010, early 2011.

Q: Even with the country's problems, over the past couple of months there has been quite a bit of focus, and a number of stories written about investing in Vietnam. Can you shed some light on why that market has stirred so much investor interest even with its risks?

A: I think the reason people have started looking it again is partly due to the fact that there is more risk appetite now than there has been. Plus, the government has acted extremely well in terms of monetary policy.

In 2010 and 2011, Vietnam had a very weak currency and inflation was over 20 percent. But since then, the government's actions have calmed that down, and its planning to increase access and the size of the market so people (investors) have become more optimistic looking forward.

Q: What are the three largest holdings in your funds?

A: The holdings are similar but in different proportions in funds, the PXP Vietnam Fund and the PXP Emerging Equity Fund; and the biggest holding is in Vinamilk, the third largest company in Vietnam.

It's a dairy producer and makes everything from milk to yogurts, ice cream and related drinks. We've owned that company since January 2005 and have made 15 times our money in that particular stock.

The second biggest holding would be Sacombank, the first Vietnamese bank to be listed on the exchange. In a country of 90 million people, there only are about 15 million bank accounts, very little in the way of consumer banking products, credit cards, car loans and so on, so there is huge growth potential in banking.

And the third largest is FPT, a software and telecommunications company. Vietnam is a country that is Internet greedy, if you like, and people also like to use their mobile phones.

So these are areas in which there is enormous room for growth. And essentially what you've got is a group of companies that benefit form the development of an economy that was very poor. Back in 1993, for example, 54 percent of the population lived below the poverty line. Now that is down to less than 10 percent. So there has been an enormous improvement in people's lives and those improvements will continue.

Q: What can you say to entice investors to invest in Vietnam other than to be well aware of the risks?

A: You know with high risks, as long as you get the timing right, come higher rewards. So the PXP Vietnam closed-end fund was up 33.5 percent last year, having had a couple of down years prior to that. And the market is 70 percent below its all-time high in U.S. dollars. So there is plenty of potential on the upside still.

While there's no doubt that Vietnam offers the kind of investment opportunities that those who love frontier investing see the potential in, one can't overlook the reality of the multiple layers of risks involved.

That said, year-to-date, the VN-Index is up 17.86 percent through Jan. 30, 2013. Over the past year, it has gained 30.72 percent, according to Bloomberg.


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