There are a few funds that invest only in Vietnam, or where the country is a prominent holding. What would you say is the main reason why investors ought to have Vietnam exposure in their overall investments?
Vietnam is one of the few countries in the world today which is actively pursuing the so-called “East-Asian Development Model,” which is the same economic development strategy that many of the leading Asian economies have used to help catapult themselves into a wealthy and developed nation in a relatively short period of time. This economic model of development essentially entails investing into manufacturing capabilities to produce goods, primarily for export. Vietnam's export-to-GDP ratio of around 90 per cent is a testament to this approach.

Can you give a few opinions on the growth dynamics of the country?
Vietnam is following a predictable path in which industrialisation coupled with urbanisation is driving the rapid growth of the country’s middle class, creating ample investment opportunities in sectors benefiting from this growth.

There is a well-established, long track record of consumer demand dynamics in emerging market countries – especially here in Asia where the examples are recent and relevant – and, as such, we are able to identify and access the companies and sectors that immediately stand to benefit as the size of the emerging middle class grows.

-- When consumers’ incomes rise and as they move into the middle class income bracket, their demand and consumption behaviours for products and services becomes fairly predictable. They consume more packaged goods, they shop at modern retail stores and shopping malls, they travel more, they demand better private healthcare services and education, they want better housing, and their demand for consumer finance and mortgages increases, etc.  These are all sectors that we look at and, in many cases, have significant holdings in our investment portfolio throughout the years. 
   
-- Furthermore, as consumers become more sophisticated, the “premiumisation” dynamic kicks in, as people want to purchase more premium versions of products and services.

-- In addition to consumer-facing companies, increased industrialisation entails more demand for construction materials, for logistics and transport services (especially for more sophisticated logistics services such as cold chain logistics) for industrial parks, and public spending to support better infrastructure. Again, these are sectors in which we have held long exposures in the investment portfolio.

-- One area that we are more cautious about – and have long held this stance – has been investing in companies that are directly exposed or heavily reliant on exports. Their source of revenue, particularly companies that produce products that are essentially commodities, such as textiles, or where margins are constantly squeezed through either higher input costs such as wages and materials or are subject to the price volatilities of commodity markets. The fortunes of such companies can ebb and flow along with potentially wide swings in commodity prices.

Vietnam has benefited from a pivot in global supply chains, gaining from the switch from China, which is already offshoring manufacturing to Vietnam, etc. How significant is this as a factor for Vietnam's growth?
-- Foreign direct investment is one of Vietnam's most important growth drivers because it is fuelling industrialisation which in turn generates lots of relatively high paying jobs, helping to propel the growth of the middle class.

-- FDI currently stands at around 5 per cent of GDP after having peaked at around 9 per cent of GDP some years ago. In comparison, China's FDI peaked at only around 4 to 5 per cent of GDP.

-- Research from Harvard University, the London School of Economics, and others indicates that the most powerful growth driver for a country like Vietnam is moving up the value chain and developing competency to produce and manufacture increasingly complex products. There is also research showing that the quickest way to move up the value chain is with FDI. We note that the prospects for continued FDI inflows into Vietnam are very positive because wages are anywhere between one-half and two-thirds below those of coastal China cities, while the quality of workers in Vietnam is comparable with those in China, according to surveys from JETRO and others.

-- There are limited ways of directly investing in the FDI theme. Obviously, investing in industrial park developers is one way of benefiting from the FDI flows coming into Vietnam. But, in general, we look to invest in the indirect beneficiaries of FDI inflows, where the ecosystem that FDI industries create will support domestic industries and produce opportunities for domestic champions to flourish (i.e., beneficiaries of the growing middle class which, as mentioned above, is being fuelled by industrialisation and FDI).

Are changes to global interest rates having a particular impact on any sectors in Vietnam, either positively or negatively?
The increase in global interest rates has not disproportionately impacted any particular sector in Vietnam, but it has driven a depreciation in the value of the VN Dong which had been nearly 5 per cent year-to-date. However, the weaker-than-expected US inflation in June has tempered the strong US dollar in recent weeks.

Depreciation pressure on the VN Dong prompted the State Bank of Vietnam to sell some of its dollar foreign exchange reserves to support the value of the VN Dong. It has also led to a modest increase in VND interest rates this year. One-year deposit rates in Vietnam are currently around 5 per cent, or up circa 10 basis points year-to-date, but the magnitude of this increase has not really been sufficient to derail economic growth or stock market performance, which remains one of the best performing markets in the region this year.

The fund
The share price/net asset value discount is about 19 per cent. What's the approach to managing/closing it, if possible?
The discount over the past year has ranged between 15 to 20 per cent. While discount levels across the investment company space have widened for the sector, our discount level has remained fairly consistent; on a relative basis. It has not widened significantly, either relative to other similar Vietnam-focused funds, or the listed private equity funds, which have seen their discounts widen significantly in recent years.

The fund’s board and the investment manager have several mechanisms to help manage the discount level, including the share buyback programme, the ongoing and regular distribution of dividends to shareholders, and the efforts that the investment manager has made in marketing and widening the shareholder base through regular roadshows, media and investor meetings. The fund has engaged in a share buyback programme since 2011, repurchasing more than $500 million in stock over that period. It has also focused on consistent dividend payouts. The fund also stresses its widely-held shareholder base, with 45 per cent institutional investors, 30 per cent wealth managers, 20 per cent retail investors, and 5 per cent index allocators. 

The two largest sector holdings in percentage terms are real estate and financials. What in your view explains why these sectors are in the top two for the fund?
Vietnam is experiencing a high rate of urban migration, as people seek better employment opportunities in major cities, along with a growing middle class. These two themes put pressure on existing infrastructure such as education, healthcare, housing, banking, and logistics. Therefore, we like to focus on sectors that benefit from the growth of the domestic economy.

We particularly like banks and real estate as these sectors are highly symbiotic. Banks have a broader, more diversified exposure to the domestic economy. Additionally, Vietnam’s stock market is predominantly driven by banks and real estate companies. Banks represent about 36 per cent of the VNI (largest weight in the VNI) and are expected to contribute about 50 per cent to 2024 earnings. 

In the longer term, banks will benefit from decent credit growth, higher penetration of mortgage and retail loans, and a rising middle class and thus bankable market. 

We expect to obtain 18 per cent to 20 per cent earnings' growth on our banking portfolio, with return on equity at 15 per cent. Valuations are attractive, with a 1.1x price-to-book ratio versus the sector average of 1.5x.

The real estate sector holds the second-largest weight in the VNI at approximately 15 per cent. Vietnam's listed real estate companies are primarily focused on residential properties. 

What does the fund like about Asia Commercial Bank (valuation, growth, revenues, market positioning, etc)?
ACB is a leading publicly listed commercial bank that focuses on the rapidly growing affluent retail and small and medium enterprise segments. We like ACB for its high asset quality, strong credit growth, prudent lending standards and risk management philosophy, as well as its low exposure to real estate and corporate bonds.