Int Fund Managers Eyeing Vietnam

Have Vietnam country funds finally proven themselves? A dozen years ago a handful of first movers jumped into the communist government's evolving economy - and were burnt as reforms stuttered.

The early fund managers admired the potential that entrances so many visitors, but had to tangle with immature corporations, confused functionaries and the lack of a formal stock market.

Within the last three years, a new generation of more carefully targeted country funds have surged in value as investors discovered the last "Confucian" society to join the global economy.

The average return on Vietnam funds could double this year, as it did last year. The rise in investor interest is reflected in an average premium for the major funds of 10 per cent, compared with a 15 per cent discount in early 2003.

The Thai-based Finansa's Dollars 50m Vietnam Frontier Fund expired two years ago after an "extremely challenging" decade of operation. It then launched a more cautious Euros 15m fund.

"We were a little bit early, we closed the doors just as (investor) interest was really taking off. We're keeping a very close eye on Vietnam, although we still think it is a tricky market to get right over the long term," says James Marshall, Finansa's chief investment officer.

Even dispassionate observers concede something exciting is taking place in a country of 82m people apparently determined to tear up the record books to achieve developed economy status.

Vietnam may only be at the start of a long, perhaps eventful, journey, admits Dominic Scriven, a founder of Dragon Capital, the country's oldest management company.

In the first three years of its 11-year existence, Dragon made no money; during the subsequent three years of economic crisis, it lost up to a third of its capital; but the last five years have seen steady improvement.

"There are always risks in a place with such a thin track record, but the economic momentum here is now so strong that even if the economy stumbled we should still do OK," says Mr Scriven.

Dragon launched its third fund earlier this year. Its great rival VinaCapital, founded by Vietnamese returnees, added to its three- year-old Vietnam Opportunities Fund by rushing out a real estate fund earlier this year. It plans to launch a technology fund soon.

Other specialist foreign managers have recently launched or are planning funds, notably PXP Vietnam Asset, Indochina Capital, Mekong Capital and Vietnam Holdings.

Country funds are currently valued at nearly Dollars 1.5bn, compared with a public equity universe of about Dollars 6bn, split between the newly formed stock market and a bubbly, popular over- the-counter board. (Licensed domestic funds are just getting started with a total of Dollars 200m under management.)

Merrill Lynch issued its first full investment report on Vietnam this year triggering a flurry of interest from overseas investors, according to Hoang Thanh Duong, a VinaCapital executive.

"You can feel the investors interest out there. We could have a very sweet period over the next five years - the economic reforms are bearing fruit and investors are getting interested," says Mr Duong.

Few people who track Vietnam seem able to disagree when the economy regularly expands at more than 7 per cent a year and exports climb as a peasant economy switches to industry.

The bitter experiences of the early funds still looms over the industry, but there is now a real opportunity for managers to show their skill, says Hiroshi Funaki, an emerging markets analyst who tracks Vietnam for LCF Rothschild Country Funds.

"Structurally a lot suggests the economy must keep rising, yet Vietnam's at the stage where outsiders can't really access the underlying assets themselves. Vietnam funds must now show what they can do," says Mr Funaki.

An immediate worry is the dearth of big firms in a stock market dominated by just two recently privatised corporations. Every fund manager wants to see the authorities chase more OTC listings on to the senior board.

There are also fears that the rumour chasing pack of local investors will get overexcited and blight the market. The regulatory regime certainly requires much work, yet the stock market withstood a sharp correction earlier this year, before picking up again.

The Vietnamese economy remains very much a work in progress. Dragon Capital now shuns start-ups, greenfield projects, private equity and vulnerable minority positions.

"We're looking for potential blue chips in fast growing sectors," says Mr Scriven. Power, telecoms, finance, food, roads and natural resources are on Dragon's list.

VinaCapital is trying to identify quality management teams in strategic industries and undervalued assets. Its property and technology funds are designed to fit core drivers of the economy. The company normally expects to surpass its in-house target of a 20 per cent return on investments, says Mr Duong.

Finansa's small fund will avoid joint ventures or start-ups, preferring privatisations. "We want our interests to be aligned with a majority of shareholders. And we want an exit route," says Mr Marshall.

Most fund managers will be disappointed with a prolonged hesitation in the putative privatisation procession. Not all are as willing as VinaCapital to embrace private equity and similar when transparency and fair-play issues abound.

Many foreign managers who track Vietnam quote with awe officials who cite Singapore as their development target. Investors might hesitate if that implies, besides vaulting ambition, permanent state direction of key industries.

Singapore is many things, but it is one of the world's least corrupt countries. Vietnam is rife with official corruption.

The southern adjunct to booming China will surely attract much investor interest, but it could be an interesting ride.