Unlike a number of my colleagues here at MitonOptimal, I’m not a skier – a dodgy knee courtesy of a teenage motorcycle accident being the principal reason for that. If I were able to hit the slopes however, I’d like to think that, after having attained a sufficient level of competence, a goodly portion of my time would be spent exploring off-piste.
As is the case with skiing, some of the most stimulating and rewarding experiences for a seasoned fund-picker and portfolio builder are to be found away from the crowded runs, where few others are prepared to venture. Though we don’t necessarily go out of our way to be different, and certainly would never take undue risk, there are invariably one or two holdings within our portfolios that reflect a healthy curiosity and perhaps even a contrarian streak amongst our team.
The recent addition of a small position with a specialist Vietnam manager within the MitonOptimal Offshore International Equity Fund is one such example of an investment away from the mainstream that piqued our interest.
Due to its “frontier” status – i.e. junior to emerging – Vietnam is not a market that appears on many investors’ radar screens. A population of 92 million that is both young (average age of 29) and highly educated (94% literacy and the seventh highest mean score within the OECD in maths, reading and science for 15-year-olds), together with an average monthly wage that is less than a third of that in China make it the most popular destination for investment in the ASEAN region. Healthy wage and consumption growth, rapid urbanisation development, combined with benign economic conditions (6% GDP growth, 2.4% inflation and 3.3% unemployment) all add up to an attractive proposition, particularly when viewed within the context of the “Asian Consumer” theme that is a strand within our equity strategy. In addition, a comprehensive series of regulatory reforms, relaxation of foreign ownership restrictions and proposed privatisation programmes are expected to provide a brisk tail-wind for the market.
Where this story becomes even more compelling for us is that both of our preferred Asian equity managers hold significant overweight positions in Vietnam relative to their benchmarks. Moreover, from our discussions with them we learned that these weightings would be even larger and the underlying companies smaller were it not for their self-imposed (downside) limits on market capitalization and liquidity. With this in mind, the fund we have chosen to invest through is intended to exploit the market’s outstanding fundamentals, without being subject to those same stock selection constraints.
Managed by a division of one of the country’s largest and well-resourced securities firms, the fund in question (a Luxembourg SICAV) primarily targets stocks in the small- and mid-cap space, based on exacting valuation and quality criteria. It is a reflection of the attractive opportunity set the Vietnamese market offers that, even with upper limits of 13x price/earnings and 1.5x price / book value, return on equity of at least 15% and a minimum 5% dividend yield, the portfolio contains between 20 and 30 stocks, backed up by a sizeable “sub’s bench”. A further interesting feature of the fund is the manager’s record of generating significant value through active hands-on engagement with their companies.
Though weekly subscriptions and monthly redemptions mean that this is not a candidate for our bespoke models, this is a fund that can sit comfortably within our International Equity Fund’s portfolio, albeit at only half the size of a normal equity position due to its liquidity terms. Happily, our foray into the deep powder has rewarded us with a 14+% gain in US Dollar terms year to date, which places the fund among the very best performing of our equity holdings.
The Rewards of Venturing Off-Piste
