Discounted NAVs offer some big clues

Nguyen Viet Hung - Director of Research & Investments, SME Securities

Rarely have the certificates been traded at a premium or at least at the par value of net asset values (NAV). Is this due to poor management or simply the fact that the products have not met investors’ expectations?

Traditionally, Vietnam-focused fund management did not focus on short-term market movements. Some underlying reasons are as follows. Firstly, due to the size of the funds, entry and exits in the short-run are very hard to implement especially with the level of liquidity of Vietnam’s financial market. Secondly, professional managers believe that market timing does not add value. In other words, trying to predict the market movements for short-term trading is simply a matter of luck.

Thirdly, except quantitative funds (which are not popular in an inefficient market like Vietnam), investors normally do not prefer short-run focused investment mandates. Fundamental approach is based on the projected cash flows and it will take months or even years to realise the ‘undervalue’ premium.

However, local retail investors enjoy short trading. In a highly volatile market, flexibility is the best way to minimise risks. Although there are no statistics showing the superiority of ‘short’ versus ‘long’ holdings, individual investors’ success stories reveal that short-term trading is favoured.

The conflict between the philosophy of local listed fund certificate managers and local retail clients reveals the low level of interest in listed funds such as VF, Prudential or Manulife. Up to now, the shareholder structure even of listed local funds is still in favour of institutions rather than the public.

Liquidity risks
In general, most funds in Vietnam, either locally or externally listed, experience NAV discount issues. Funds focusing on over-the-counter (OTC) stocks, which experience NAV discounts, are explainable. However, even funds with over 80-90 per cent of their equity invested in listed firms encounter the same issues, trading around 20-30 per cent below their NAVs. What are the likely explanations?

Market liquidity is still low. The typical feature of big funds is that their size is substantial compared to one trading day. For many stocks, it might take them a few months to liquidate these particular portfolio stocks through daily trading.

Lack of transparency on the pre-listed portions. Even for listed-focused funds, some percentages are on the side of pre-listed firms. In practice, fund managers tend to keep them at book value unless there are clear signals of deterioration. In the periods of market downturn, the concept of ‘book value’ does not sound ‘right’ for knowledgeable investors. For risk management purposes, the best approach is to mark down the NAV of funds.

Execution risks. Assuming investors intend to liquidate the funds, it is a very long process, which might be months or years. By the time of liquidation, such expected premiums, if any, might no longer exist if the size is small, say 2 or 5 per cent. That explains why the NAV gaps tend to get smaller and smaller once liquidation decisions are made.

Is this a worrying issue?
Discounted NAVs seem to reflect the market inefficiencies, not market failures. There are huge potential benefits that should be viewed more positively, including: - Increasing the pressure on fund managers to enhance the level of transparency, especially on the OTC investments.

- Increasing performance stresses on fund managers, which create room for new ideas and market competition. Over the long run, this will speed up the development of Vietnam’s financial market qualitatively and quantitatively.

- Improving the attractiveness of similar products in the future so as to better meet investors’ demands. Once the regulations for open-ended funds are approved, close-end funds will face up to strong competition. Fund managers will have to better ways to meet the risk-return expectations of the clients.

- Enriching fund managers’ experience for similar challenges in the future once the market becomes more sophisticated. The fact that Vietnam’s NAV discounts are currently one of the highest in the region reflects the stage of its market development.

As the market grows and new ideas are deployed, such gaps will gradually be narrowed. It is not only good for fund managers but for investor community as a whole.