Emerging Markets

Dragon Capital's VEIL Trust Smiles On Banks, Remains Upbeat On Vietnam

Tom Burroughes Group Editor 16 May 2024

Dragon Capital's VEIL Trust Smiles On Banks, Remains Upbeat On Vietnam

We catch up with a Vietnam-focused fund manager, and talk about new listing ideas, the state of the Asian country's economy, business sectors, and more.

A Vietnam-focused investment trust is heavy with banks and other financial services business, and its managers like the look of technology, consumer discretionary and real estate firms. 

Vietnam Enterprise Investments Limited, a listed investment trust trading on the main market of the LSE, is managed by Dragon Capital. One of the more recognisable players in the world of emerging and frontier markets, Dragon Capital’s founder and chairman, Dominic Scriven (pictured), recently caught up with this publication on a trip to London. 

VEIL is a single-country fund which is still in an MSCI Frontier market. VEIL’s 10-year net asset value return is annualised at 13.4 per cent compared with just 4.8 per cent in the FTSE 250 (of which VEIL became a constituent in 2017).

“Five of our top 10 holdings are banks because the sector constitutes 40 per cent of the VN Index and is expected to contribute 60 per cent to 2024 earnings,” Scriven said. “Banks have seen significant growth over the past decade due to digitisation and the rise of the middle class – 70 to 80 per cent of the population is now online. Banks have developed interactive apps that enable them to collect more fees and reduce costs. 

“These holdings require a combination of understanding both top-down macroeconomic factors like US Federal Reserve rate policy domestic monetary policy as well as a bottom-up approach, focusing on shareholder alignment and consistent earnings' potential,” Scriven continued.

“For example, ACB leads in small- and medium-sized enterprise lending, TCB excels in retail mortgages, MBB is a pioneer of digitisation, VPB is one of the largest retail lenders, and VCB stands out for its high asset quality and stability as a state-owned commercial bank. These align with our core themes of urbanisation, an affluent and growing middle class, and the recovery of infrastructure."

Scriven said he expects to obtain 18 to 20 per cent earnings' growth on the trust’s banking portfolio, with return on equity at 18 to 20 per cent, and valuations at an “undemanding” 1.2 x price-to-book ratio versus the sector average of 1.4 x.

Tech, consumer discretionary and real estate
Away from banks, Scriven said winds are set fair for technology stocks, particularly following recent developments such as the Vietnam-US Comprehensive Strategic Partnership focusing on the semiconductor industry and AI applications. At a forward 2024 price-earnings ratio of 19 x, Scriven said tech looks undervalued in the long run. 

“The consumer discretionary and real estate sectors are [also] attractive options for value-conscious investors due to the rising middle-class with increased spending power,” he said, noting that retail firm trade at 10 to 12 x enterprise value/earnings before interest, taxation, depreciation and amortisation, while property developers are valued at a price-to-book ratio of around 1.3 x.

Something to consider for closed-ended trusts, particularly at times when stock market liquidity can sometimes be under pressure, is the share price discount to net asset value. 

The VEIL trust has been steadily buying back stock to control the share price discount to NAV, which is in the region of around 17 per cent. The trust is slated to hold its continuation vote in 2025. There is a series of such votes under way across the investment trusts sector in the UK. Investment trusts have to contend with a few challenges. For example, Scriven said that recent mergers of wealth managers have led to minimum ticket sizes for these new larger institutions being too big for the investment trust sector. (While Scriven did not mention M&A deals by name, consolidation moves include the RBC Wealth Management merger with Brewin Dolphin, and the Rathbone/Investec deal, to name just two.) 

The Vietnam story
While still, ostensibly, a communist country, Vietnam’s move towards a form of capitalism since the late 1980s – akin to the changes in mainland China over roughly the same period – has seen its profile surge in popularity with frontier/emerging market investors, not to mention its rise as a holiday destination. 

Still classified as a frontier market, the country wants to achieve emerging market status – however, controls such as limits on foreign ownership need to be lifted before that can happen. 

But the hard numbers suggest that Vietnam’s emerging market ambitions are credible, Scriven said. 

“Despite being classified as a frontier market, Vietnam's market capitalisation ($273 billion) surpasses emerging markets such as the Philippines ($169 billion) and Qatar ($140 billion), while offering higher daily liquidity ($1.2 billion) than Indonesia ($601 million), Mexico ($571 million), and Malaysia ($470 million),” he said. 

Scriven said the government’s recent draft circular by the State Securities Commission of Vietnam (SSC) to eliminate pre-funding is a “substantial step” towards aligning the market with global standards.

Vietnamese equities have chalked up returns (capital gains and reinvested dividends) of 211.2 per cent in the decade to 31 March, in sterling terms, handily beating every MSCI emerging market constituent except India (+255.0 per cent) over the same period. The MSCI EM index itself returned 83.2 per cent in this time.

Vietnam is getting better known as an investment opportunity, but that does not make it harder to find the “diamonds,” Scriven said. 

“There are now over 1,500 companies listed on the equity market, with those having a market cap over $1 billion increasing from seven to 50, and daily liquidity often exceeding $1 billion.

“More companies report results in English, and there is broader sell-side coverage (the SSC recently issued a circular that highlights mandatory English language disclosures for large public companies by January 2025. This is a significant step in transparency for international investors, who currently account for 10 to 15 per cent of daily trading). This growth has expanded the investable universe and presented active managers with more opportunities,” he added.

The trust has a particular approach to how concentrated its portfolio is. 

"We are ready to build large positions in companies in which we have high conviction with long-term growth prospects. However, we manage concentration carefully, considering factors like liquidity, market capitalisation, and business sustainability. For example, for highly liquid stocks, a larger position is safer because it's easier to exit if needed. We don’t maintain official hard limits but for stocks over 1 per cent of VNI [Vietnam Index] we generally maintain a 5 x overweight or 12 per cent, whichever is lower, limit," Scriven said.  

The trust does employ borrowing. 

"The borrowing is a cash management facility to allow VEIL to trade more efficiently in the market when rebalancing or positioning itself for structured deals rather than being used to take enhanced positions on companies in the hope of boosting returns, he added.

(This news service has interviewed Dragon Capital before, as in the case here.)

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