By Annabel Brodie-Smith
Well, it’s been quite a week with a Halloween announcement of the disappointing news that Lockdown 2.0 was on its way. I’m very relieved schools are staying open. I really can’t cope with the challenge of running a school from home while trying to work at the same time, especially with my Mother still hobbling after her accident. We embraced the news with a Halloween ghost walk at Oxford castle and prison which definitely scared us!
And the US election is still going on. Hopefully we will soon know the Americans’ choice of president. We don’t want a repeat of the 2000 Bush versus Gore election. It all came down to Florida and the ‘hanging chads’, the result was delayed by five weeks and it was only resolved by the Supreme Court.
This month we are moving east to explore opportunities in Asia. Half of the population in Vietnam is under 35 and the country has impressively only registered 35 Covid deaths from 1,180 cases. Of course, some deaths may not have been registered but the short lockdown has been effective and the Vietnamese economy is expected to grow this year despite the pandemic.
I have never been to Vietnam but I love the food and had a memorable night at an amazing Vietnamese restaurant in Senegal, West Africa of all places. Vietnam has suspended entry to all foreigners due to Covid so we can’t visit at the moment but we can invest. Read the article to find out more from the managers of the three investment companies investing in Vietnam and discover the other investment companies with Vietnamese exposure.
Ian Cowie, our intrepid investment writer, is also in Asia with a “compare and contrast, as the exam papers used to say” of European and Asian governments’ responses to the coronavirus and what it means to investors. Asia’s competent handling of the crisis, including swiftly taking difficult decisions - Vietnam closed its boarders from early March - has clearly helped the region. The AIC’s Asia Pacific sector is up 25% over the past year, despite all of its difficulties, and over ten years it’s up 159% which contrasts sharply with the UK’s performance.
Finally, Kyle Caldwell has made his Compass debut with an analysis of the pandemic’s impact on income-seeking investment companies. Overall, investment companies’ income advantages have stood them in very good stead in comparison to the FTSE 100. Kyle also considers whether boards will consider paying dividends out of capital profits if the dividend drought continues next year and he explains the pros and cons of doing so.
Recent research we conducted with Research in Finance shows that the pandemic is having a very real impact on investors’ portfolios and lives. A total of 41% of income investors believed that the pandemic had caused a big or considerable impact on their portfolios and 17% of these investors have had to change their lifestyle or plans due to this. What was interesting was the pandemic and income cuts had less of an impact on the portfolios of investment company investors in comparison to investors who did not hold investment companies.
Those income advantages, again, came through for investment company investors. Unlike open-ended funds, investment companies have the ability to retain some of the income they receive from investee companies and this is held in their revenue reserves. During tough times, like now, investment companies can use this revenue reserve to boost their dividends to shareholders. Investment companies also have the ideal structure for investing in hard-to-sell income-generating assets like renewable energy infrastructure. Of course, dividends are never guaranteed but these benefits are reassuring for investors in these difficult times.
Well, after this Asian feast, it’s got to be either a Chinese or a curry takeaway tonight.
Hope your month is as good as it can be in lockdown.
Stay safe and keep smiling.
Communications Director, AIC
Investment company managers make the case for Vietnam
With half of its population under the age of 35 and a rapidly expanding middle class, Vietnam is one of the most dynamic frontier economies. It has also been a COVID-19 success story registering just 35 deaths from 1,180 cases. The effectiveness of its short lockdown meant Vietnam began reopening as long ago as April and the Vietnamese economy is forecast to grow in 2020 despite the pandemic.
When it comes to investing in Vietnam, where are the best opportunities and how do they differ from those of other Asian countries? What’s the attraction of accessing them in a single-country fund versus a broader frontier markets strategy? And how could Vietnam’s relationship with China affect the outlook for the region? The AIC has gathered comments from investment company managers investing in Vietnam.
Source: AIC/Morningstar (latest available data at 30/09/2020).
Khanh Vu, Co-Manager of VinaCapital Vietnam Opportunity Fund, said: “The main attraction of investing in Vietnam is that the country is following in the footsteps of other ‘Asian Tiger’ economies that came before it such as Japan, Korea and Taiwan. So the future trajectory of Vietnam's per capita income, consumer spending, and of the general wealth of its citizens is fairly clear. Furthermore, Vietnam is essentially the only Asian Tiger country left to invest in – given how far economic development of other Asian Tigers has already progressed.”
Emily Fletcher, Portfolio Manager of BlackRock Frontiers, said: “Vietnam has been a poster child for frontier markets, having experienced strong economic and social development over the past two decades. The country has seen the benefits of more than $149 billion in foreign direct investment inflows over the past 20 years, supported by accelerating supply chain migration from China – a trend that was established well before trade tensions between China and the US emerged. This has driven huge increases in manufacturing production, such that exports have grown at a compound annual growth rate of 15.8% over this period. Domestically, demographics are in favour of sustainable growth.”
Craig Martin, Manager of Vietnam Holding, said: “Vietnam’s GDP per capita is expected to reach $5,000 by 2025, and by 2035 there could be a further 35 million middle-income consumers in the country. We think this provides exciting prospects for investors. Vietnam is a very open economy from a trade perspective, with more than 200% of its GDP in exports and imports. Over the last three decades it has transformed from an exporter of raw materials, to a producer of finished and semi-finished goods, as well as exporting services – such as information technology."
Ewan Markson-Brown, Manager of Pacific Horizon, said: “So far Vietnam can be considered one of the more successful countries at dealing with COVID-19. It has registered just over 1,000 cases and 35 deaths. The country initially strictly controlled movement internally and externally and reduced cases to zero, however after 99 days of no cases, an outbreak did occur in Da Nang. Given the country’s relatively low level of income it stands out as one of the world’s success cases.”
Craig Martin, Manager of Vietnam Holding, said: “Vietnam’s handling of COVID-19 has rightly won praise and admiration from many other nations. Books will be written on how Asia as a whole dealt with the pandemic versus ‘the West’ and ‘the rest’. It is too early to attribute any one factor as the key success factor, but certainly the cohesiveness of society and the single-mindedness of the people in taking on a threat has been a key part of the resilient response. Let’s not forget that Vietnam was an early victim of SARS in 2003, and regularly faces disease risk from Avian Flu and Swine Flu, so arguably has developed better responses, protocols and communications to deal with emerging infections, and indeed pandemics.”
Dien Vu Huu, Portfolio Manager of Vietnam Enterprise Investments Limited, said: “Having dealt with SARS in 2003, Vietnam responded quickly to COVID-19. From early March air, land and sea borders were all but sealed to human traffic though not to trade. Formal lockdowns have been few, brief and localized, which has limited the economic impact while monetary and fiscal easing have been aggressive, with local government bonds now bearing negative real yields. Hospitality and tourism have been affected of course, but domestic consumption has rebounded and stabilised and exports continue to grow. The unfreezing of infrastructure spending has added another driver of growth which is being reflected in the local market.”
Opportunities in Vietnam
Gabriel Sachs, Manager on Aberdeen Standard Asia Focus, said: “We are bottom-up investors of course but from a macro perspective we are very positive on Vietnam and have been building positions in a couple of companies over the past two years or so. At the moment we have almost 4% of the portfolio in Vietnam. The two companies operate in very different sectors – Nam Long is an affordable housing developer primarily based in Ho Chi Minh City and the other, FPT Corp, is a conglomerate which operates primarily in the IT services industry but has fast-growing telecommunications and education businesses. It is by far the leading tech company in Vietnam hiring a third or more of all computer science graduates in the country, many of whom study in FPT’s own campuses.”
Khanh Vu, Co-Manager of VinaCapital Vietnam Opportunity Fund, said: “Currently, the manufacturing sector accounts for less than 20% of Vietnam's economy, but manufacturing contributed over 30% of GDP in each Asian Tiger economy at the peak. This is an indication of the extent to which Vietnam's future economic growth will be driven by the further development of the manufacturing sector – and the COVID-prompted relocation of factories from China to Vietnam will accelerate this development.”
Emily Fletcher, Portfolio Manager of BlackRock Frontiers, said: “The young, relatively well educated, and increasingly connected population has helped steer change in how businesses interact with consumers. With over 51 million smartphone users, representing 80% of the population aged 15 years and older, awareness of mobile internet and usage has increased, sparking further evolution of retail services. Similarly, the global trend of improving health and wellness has not been lost on Vietnam, leading to shifts in nutritional preferences and the way people shop for food. Seen through this lens, consumer related industries remain preferred areas for investment.”
Dien Vu Huu, Portfolio Manager of Vietnam Enterprise Investments Limited, said: “An innovator worth mentioning is Mobiworld Group. It is Vietnam’s top retailer, with 3,600 stores nationwide, selling mobile phones and consumer electronics, and is now moving into small supermarkets. Management has proven adept at deploying technology and systems to roil up fragmented industries, leading Vietnam into the modern trade era.”
Craig Martin, Manager of Vietnam Holding, said: “Vietnam is likely to be the largest constituent of the MSCI Frontier Market index by the end of 2020, and already has many characteristics of an emerging market opportunity (100 million people, $180 billion market capitalisation). Along with China it is one of the few growth stories in 2020 and is positioned for a strong 2021. The manager of Vietnam Holding, Dynam Capital, has a Vietnamese team on the ground, who are able to research and react to market developments in a nimble fashion.
“We also have the ability to build and manage a concentrated portfolio – we have around 25 positions in the Vietnam Holding portfolio currently – and this focus enables us to deliver on our ESG strategy. Vietnam Holding has been a signatory of the United Nations Principles for Responsible Investment for over a decade – one of the first firms in Vietnam to chart a course of responsible investing.”
Dien Vu Huu, Portfolio Manager of Vietnam Enterprise Investments Limited, said: “As a frontier market, Vietnam remains off the formal radar for most large investment firms who have no on the ground presence or ability to investigate opportunities in this rapidly evolving market. By contrast we have close to 20 analysts able to do this. Our main shareholders are global institutional investors which reflects this asymmetry in access to information. They can simply buy Vietnam Enterprise Investments Limited on the London Stock Exchange and thereby access stocks at their foreign ownership limits at a discount to NAV and without having to open a local trading account.”
Relationship with China and long-term outlook
Ewan Markson-Brown, Manager of Pacific Horizon, said: “Vietnam has had a long and tumultuous relationship with China stretching millennia. Today China sees it as an export market, a cheap manufacturing hub, a place for real estate investment and a potential gateway into South East Asia. It is also a geopolitical rival with claims on the South China Sea among other territorial issues. Managing this relationship will be critical to Vietnam’s rise over the next few decades.”
Gabriel Sachs, Manager on Aberdeen Standard Asia Focus, said: “The country has been one of the fastest-growing markets in the region and we don’t see that changing. The government has handled COVID-19 very well which means the economy is operating rather normally now and the consumer is in reasonably good shape. The intensifying US-China trade spat will likely only improve the attraction of Vietnam as global corporates look to diversify their supply chains away from China.”
Craig Martin, Manager of Vietnam Holding, said: “China is an important trading partner for Vietnam. As China develops and grows, there is likely to be a demand for agriculture and aquaculture products from Vietnam, as well as processed food products. As the US rallies support for a bipartisan ‘us versus them’ approach to China, Vietnam is positioned to be an increasingly important alternative destination for manufacturing – which would further increase its foreign direct investment and hasten infrastructure development."
Ian Cowie compares reactions to COVID in Asia and Europe
Compare and contrast, as the exam papers used to say, European and Asian governments’ reactions to the global coronavirus crisis - and their implications for investors. What follows will make uncomfortable reading for many folk and questions any assumption that the west is always best.
Asia was the first continent to experience Covid-19 and now its economies appear to be among the first to recover. While Britain and France submit to a second lockdown, Korea and Japan seem to have the crisis under control. Taiwan recently reported that it has not found a single new case of the coronavirus for 200 days.
As perhaps the last man left in England who makes no claim to expertise in epidemiology, I am content to accept World Health Organisation (WHO) statistics on confirmed cases of Covid-19 and associated deaths. At the time of writing (November 2), the WHO Coronavirus Disease Dashboard reports more than 46m cases and 1,196,362 deaths. That shows the scale of the problem. More positively, it seems that a swift shutdown of social activities and travel in some Asian countries has curbed the disease more effectively than deferring difficult decisions and hoping for the best.
Vietnam was one of the first countries to effectively close its borders and now the WHO reports it has 1,180 coronavirus cases and has suffered only 35 deaths. Recent history helped, as Dien Vu Huu, fund manager of Vietnam Enterprise Investments Limited (stock market ticker: VEIL), explained: “Having dealt with severe acute respiratory syndrome (SARS) in 2003, Vietnam responded quickly to Covid-19. From early March air, land and sea borders were all but sealed to human traffic though not to trade. “Formal lockdowns have been few, brief and localised, which has limited the economic impact while monetary and fiscal easing have been aggressive.”
Similarly, China - now the second largest economy in the world - was able to take decisive action with little debate. The economic impact of these cultural variations between East and West can be seen in global stock markets.
For example, independent statisticians Morningstar report that the average conventional investment company - that is, excluding Venture Capital Trusts - has delivered total returns of 9% over the last year. Those in the Association of Investment Companies’ (AIC) North America sector did twice as well with an average total return of nearly 20%. But the AIC’s Asia Pacific sector did even better with an average return of 25%, despite all the difficulties of the last year.
To put those numbers in perspective, the AIC’s UK All Companies sector lags far behind the global average, having shrunk by minus 10% over the last year. One explanation is ongoing uncertainty about how Brexit will work when the transitional period ends in December.
Within all those averages, there are wide variations in individual investment companies’ performance. For example, Pacific Horizon (PHI) is the top performer in the Asia Pacific sector over the last year, five years and 10 years with eye-stretching returns of 121%, 300% and 340% respectively. This £461m investment company, managed by Baillie Gifford, includes among its most valuable holdings the Singapore-based internet platform, SEA; and the Chinese e-commerce giants, Alibaba and JD.com. Sad to say, PHI pays no income and trades at a 16% premium to its net asset value (NAV). Its nearest rival in this sector over the last year and five years is Schroder Asian Total Return (ATR) which has delivered total returns of 27% and 165% with a dividend yield of 1.4%, trading at a 1.8% premium to NAV. ATR’s top holdings are Alibaba; the self-descriptive Taiwan Semiconductor Manufacturing Company; and the Korean giant, Samsung Electronics.
Investors with a higher requirement for yield may prefer the AIC’s Asia Pacific Income sector. JPMorgan Asia Growth & Income (JAGI) is the top performer in this sector over one, five and 10-years with total returns of 28%, 152% and 135% respectively. JAGI yields 3.5% and trades at a 2.3% premium to its NAV.
Schroder Oriental Income (SOI) yields 4.4% dividend income and trades at a 6.9% discount to NAV. However, its total return was negative at minus 8% over the last year, following five and 10-year returns of 49% and 118%.
The AIC’s Country Specialist: Asia Pacific ex-Japan sector may also repay consideration. JPMorgan China Growth & Income (JCGI) is the top performer over one, five and 10 years with total returns of 107%, 302% and 315% respectively. JCGI yields 3.5% and trades at a 2.7% premium to NAV.
It’s only fair to confess that my decision to sell investment companies with high exposure to China earlier this year, after reading allegations of human rights abuses, has cost me dearly in terms of financial returns foregone. However, investing internationally continues to diminish risk by diversification and can maximise returns by enabling individuals to benefit from income and gains wherever they may arise.
The current crisis poses many questions. Investment companies with assets allocated across a wide range of companies, countries and currencies can provide an answer.