Kingsmead readies Vietnam small-/mid-cap fund
Vietnam has been a “terrible place to invest” since the 2008 financial crisis, admits John Foo, chief executive and chief investment officer of Kingsmead Asset Management. But he argues that the country is on the cusp of a turnaround, despite recent turmoil there.
An influx of foreign direct investment (FDI) over the past few years has stabilised the currency and resulted in a current account surplus since 2012 after several years of deficit since 2006, said Foo, and inflation and interest rates have declined to a manageable level.
“We expect a three- to five-year upward trajectory in the economy, as FDI is projected to increase by 15% annually," he noted (see figure below).
Admittedly, Foo is somewhat biased, as his firm is readying a fund focused on small- and mid-cap Vietnamese stocks, an area he sees as under-researched and under-invested. To this end, Kingsmead opened an office in Ho Chi Minh City in March and staffed it with three analysts. Their research also feeds into the firm’s existing $35 million Asia long/short equity strategy.
The Vietnam fund is slated to launch on August 1 with around $20 million, including $2 million of Foo’s own money. The firm is also talking to bigger institutions about them putting money into both of its strategies. It will not offer segregated accounts though: “People running managed accounts usually are seeking a shorter time horizon.”
The Cayman Islands open-ended strategy will have a capacity of $100 million due to the relative illiquidity of the stocks it is targeting, and will charge 1.5% and 15% management and performance fees, respectively.
“The goal is to find 20-25 undervalued small- and mid-caps in the next few months that have the potential to at least double in value over a two-year period,” said Foo.
Most investors focus on the top 50 stocks in the index, he added, but Kingsmead will focus on numbers 51 to 200 of the total of 740 names. Such stocks will form 70% of portfolio. The rest might be IPO opportunities or larger-caps undergoing restructuring.
Foo said other Vietnam funds tend to either buy the top 20-30 stocks in an index or have 25-40% invested in unlisted private equity and the rest mostly in the biggest 50 stocks.
There are only a few strategies focused on the listed small-/mid-cap space, he added. And many of the existing funds “have been through the vicious and long bear market from 2008 to 2012, and some have had to include unlisted investments in their funds in an effort to churn out returns”.
Kingsmead was set up in March 2012 and now has 10 staff, including three analysts in Singapore and one in Hong Kong.
As for the market environment for the launch, Vietnam has been starved of capital due to poor market performance in recent years, and is set to benefit from a new wave of foreign investment, noted Foo.
“We see Vietnam as like China in the mid-1990s, with labour costs still very low,” he said, adding that the cost per worker, including food and living expenses, is $500-600 per month in China, whereas in Vietnam it is $200-250.
Foo has just returned from Korea, where he said people see Vietnam as being at a similar stage to their own country in the late 1950s. “So they feel there is 50 years of similarly rapid development to come.”
Moreover, he pointed to strong economic growth over the past few years (see figure below) and independent forecasts of strong growth for the next few. He also cited a stable Vietnamese dong over the past three years and said inflation is under control.
The stock market may be down close to 70% in dollar terms from 2007, added Foo, but there are many “exciting IPOs” in the pipeline for the next few years. He also sees the impending signing of the Trans-Pacific Partnership free trade agreement as something that will benefit Vietnam hugely.
Domestic stocks are up 17% this year in local terms and 16% in dollar terms as of July 7, and in 2013 they rose 32%.
However, investor confidence was hit following riots in mid-May after China's move to station an oil rig in disputed waters, with equities falling some 12%, though they have since recovered.
Foo, who was in Ho Chi Minh City on the week of the protests and is in Vietnam every three weeks, sees the events as a “one-off disturbance”, and that the rioting was nipped in the bud quickly.
Also, it did not seem particularly widespread, he added, given that the areas he was in – Binh Duong and Dong Nai provinces – were only mildly affected.
Asked how he views growing competition for assets in Vietnam, including from big fund houses such as Eastspring and Franklin Templeton, Foo said he sees this as good for the country. It will mean more money flowing in, market capitalisation rising and more IPOs, he added.