Interactive Investor

Ian Cowie: this top-performing trust is on a huge discount

8th July 2021 09:22

Ian Cowie from interactive investor

It is foolish for investors to ignore political risk, which is a key reason why our columnist favours Vietnam over China.

How do you fancy a £1.8 billion investment trust that has delivered eye-stretching total returns of 68% over the last year, but still trades at a 17% discount to its net asset value (NAV)?

Full disclosure: I am a happy shareholder in this overlooked and undervalued giant but suspect it is towards the top of the risk and reward spectrum.

Vietnam Enterprise Investments Limited (LSE:VEIL) listed on the London Stock Exchange five years ago this week but most investors continue to regard its booming emerging market as a bridge too far. Instead, it is much easier to follow fashion and buy into the crowded trade of China.

Sad to say, that’s been a mistake for several reasons recently - and there might well be worse to come. Vietnam is replacing China as a low-cost producer and their relative performance reflects that fact, alongside rising political risks.

For example, Fidelity China Special Situations (LSE:FCSS), which now has total assets of £2.7 billion, and JPMorgan China Growth & Income (LSE:JCGI), a £614 million trust, both delivered total returns of 48% over the last year, according to Morningstar via the Association of Investment Companies (AIC). From a purely financial point of view, there’s nothing wrong with FCSS or JCGI’s recent returns but both are a long way behind VEIL.

Now here’s another reason to consider Vietnam. Maybe money should not be the only consideration for serious investors when no less an authority than US president Joe Biden has accused China of “genocide”.

Lest I sound naive, this might be a good time to report that I first invested in what was then called Fleming Chinese, later renamed JCGI, after two business trips there in the 1990s. But I sold all my direct China exposure, including FCSS, in April last year after reading about “re-education camps” in Xinjiang, western China, where more than one million Uighurs are locked up.

Laugh if you like, but my revulsion was partly prompted by morality - I won’t support oppressive regimes - and also pragmatism; I don’t want my life savings exposed to a cold war that shows worrying signs of heating up. For example, consider Chinese president Xi Jinping’s statement last week that any foreign power interfering in that country “will have their heads bashed bloody against a Great Wall of steel”.

Violent words sometimes turn into violent deeds, as Japan’s deputy prime minister pointed out this week when he talked about joining the US in defending Taiwan against a potential Chinese invasion. Taro Aso, finance minister and deputy to Yoshihide Suga, said: “If a major problem occurred in Taiwan, it would not be going too far to say that it could be an existential threat. In such a case, Japan and the United States will have to work together to defend Taiwan.”

Let’s hope it doesn’t come to that but it is foolish for investors to ignore political risk. One of the first articles I wrote as a cub reporter in the City office of a Fleet Street newspaper 35 years ago was about busted bonds issued by pre-communist authorities in China and Russia. That’s when I first heard a senior colleague -  the kind, wise and witty Christopher Fildes - define an emerging market as “a market from which it is difficult to emerge”.

Here and now, Vietnam offers an alternative to China for investors willing to accept high risks in pursuit of high rewards. I am glad I bought shares in VEIL at 404p in July 2018, that traded at 720p this week; it’s now the 12th most-valuable holding in my ‘forever fund’.

Looking forward, Vu Huu Dien, fund manager of VEIL, said: “The outlook for Vietnam remains positive, especially as it has been able to minimise the impact of Covid-19 compared to other Asian countries.

“This market is likely to benefit from low rates and infrastructure spending for the foreseeable future and within VEIL we are tapping into the interlocked sectors of banks, property and steel where value and growth opportunities abound. Other sectors where we see value plus growth are retail and technology.”

Other investment trusts focused in this country include VietNam Holding (LSE:VNH), with total assets of £145 million, trading at a 22% discount to NAV, despite a total return just under 68% over the last year; and VinaCapital Vietnam Opportunity (LSE:VOF), a £981 million fund trading at a 16% discount, after returning 51% last year.

Ongoing charges, including any performance fees, are on the high side at 2.19% for VEIL; 3.08% for VNH and 1.72% for VOF. But this isn’t the sort of market you can access on your own.

Vietnam remains a long way short of being a liberal democracy where human and property rights are protected by a free press and an independent judiciary. But, unlike China, Vietnam’s war with America and the West is firmly in the past - not, potentially, in the future.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie is a shareholder in Vietnam Enterprise Investments Limited (VEIL) as part of a globally diversified portfolio of investment trusts and other shares.

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