Dragon Capital launches Vietnam’s first open-ended fund with cash dividends for passive income

June 06, 2024 | 12:01
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DCDE is Vietnam's first open-ended equity fund to distribute cash dividends, offering non-professional investors a passive income option. This strategy combines the advantage of a regular income stream through attractive dividends and long-term capital growth based on the stock market’s ongoing development and performance. Nguyen Sang Loc, portfolio manager at Dragon Capital, discussed with VIR’sPhan Hang the fund's investment approach and risk mitigation strategies in the current volatile market.
Dragon Capital launches Vietnam’s first open-ended fund with cash dividends for passive income

Why does the DCDE Fund distribute dividends instead of retaining them for reinvestment? Distributing dividends reduces the net asset value per fund certificate (NAV/unit) accordingly. What are the benefits for investors in the DCDE Fund?

Globally, open-end funds that distribute dividends to investors are common, aligning with their needs in personal financial planning, especially in a low-interest rate environment where passive income is diminishing.

In the Vietnamese market, this type of product is relatively new. Many people still believe that only traditional channels like savings accounts and real estate can provide passive income.

The DCDE Fund distributes dividends to offer an additional option for investors seeking annual cash flow. Meanwhile, the remaining assets in the portfolio, consisting of stocks, continue to have growth potential through the development of the stock market. This strategy helps investors achieve both a regular income and long-term growth from their investment in the fund.

Naturally, the net asset value (NAV) of the fund will be adjusted downward by the amount of dividends distributed. When dividends are paid in cash, this amount is deducted from the fund’s total assets, leading to a decrease in the total NAV and a reduction in the NAV per unit.

This adjustment is normal and does not impact the fund’s long-term capital growth expectations. In fact, dividend distribution can be viewed as a positive indicator of the fund’s profitability, and investors can still anticipate long-term capital growth.

What will be the annual dividend payment policy of the DCDE Fund?

The DCDE Fund aims to provide an annual dividend to investors, offering an additional income stream alongside traditional investments like real estate and savings, thus simplifying financial planning.

Recently, DCDE announced a 2023 cash dividend payout of 5.1 per cent of NAV, equivalent to 13 per cent of the fund's unit par value. This product not only serves domestic investors, but also caters to expatriates and foreign professionals in Vietnam. These individuals are familiar with dividend-paying funds, but may lack the market knowledge to invest independently in a new environment. Therefore, they can entrust their investments to professional organisations like DCDE.

DCDE effectively meets both needs. The DCDE investment portfolio is thoroughly researched and efficiently managed, considering valuation alongside company quality and dividend payouts. For instance, a company with only 5 per cent annual growth cannot receive a significant asset allocation in the portfolio, as its stock lacks substantial price appreciation potential, which would reduce the fund's effectiveness. Consequently, at a certain point, we will divest to realise profits to reallocate to other companies with greater potential. This approach ensures future dividend growth, maintaining the fund's dividend income and meeting investor payout expectations.

A product like the DCDE Fund carries moderate risk. If the market increases by 20 per cent, expecting the fund to grow by 30 per cent is unrealistic; a more acceptable growth rate would be 22-23 per cent. Conversely, if the market declines, the fund's decrease would be less severe. This means that investors in the fund seek a balanced portfolio that manages risk and return, providing steady income, rather than aiming to lead the market in profitability.

Why should one invest in dividend-paying fund certificates?

Investing in dividend-paying fund certificates offers significant benefits, including a stable income stream and the potential to recover capital over a specific period. Similar to rental income from real estate, if you purchase a fund certificate for $0.42 (VND10,000) and the fund pays an annual cash dividend of $0.042 (VND1,000) per certificate, you can recover your initial capital within ten years (excluding inflation). Meanwhile, the asset's value, like property, continues to grow over the long term.

Likewise, companies in the portfolio will grow and generate profits through their operations. Once the initial capital is recovered, all subsequent dividends become net profits, allowing investors to benefit from the fund's growth with zero capital cost.

For these reasons, dividend-paying fund certificates are an attractive investment for those seeking stability, regular cash flow, and long-term capital growth.

What is unique about DCDE’s portfolio structure, and what are the fund’s investment allocation criteria and risk management processes?

The DCDE Fund features a diversified portfolio across various sectors, focusing on companies with strong financial health, a commitment to paying dividends, and a consistent dividend payment history.

Portfolio allocation is crucial. Some companies with strong resources may pay high, regular dividends but lack growth prospects. Conversely, some companies may pay lower dividends, reserving funds for reinvestment with better business prospects. Allocation ratios vary to ensure the portfolio is profitable and generates sustainable income without relying on a single source. If a company reduces its dividend payout policy in the medium term, the fund will shift to more valuable companies.

Considering the dividend yield is essential. For example, if a company's stock is priced at $4.17 (VND100,000) today and pays a $0.42 (VND10,000) dividend, the yield is 10 per cent. However, if the stock price rises to $8.33 (VND200,000), the yield becomes less attractive, and sometimes selling for a capital gain is more beneficial.

Companies can be categorised into two main groups: value companies with limited growth that distribute most of their earnings as dividends, and growth companies whose leadership's interests align with the company’s performance, often increasing dividends annually as the company grows. The fund balances these two groups according to market phases.

Thus, portfolio allocation is meticulously managed and continuously evaluated. Investment weighting in sectors and stocks is critical to risk management, avoiding excessive concentration in a single investment to mitigate market volatility risks.

What is DCDE's outlook for the market for this year?

Before addressing this question, let’s consider the expectations of individual investors for this product. For example, if an investor has $4,167 (VND100 million) in a savings account with a 5 per cent annual interest rate, the bank would pay $208 (VND 5 million) in interest per year. However, if the balance drops to $3,958 (VND95 million), it's unrealistic to expect $208 (VND5 million) in interest from the bank at the end of the year.

With the DCDE Fund, if you invest $4,167 (VND100 million) and market fluctuations reduce your investment’s value to $3,958 (VND 95 million), actively buying and selling might not be efficient due to high transaction costs. Instead, a more effective strategy would be to increase purchases when the market drops and reduce them when it rises. Although the market will experience short-term volatility, it tends to recover and grow over the medium to long term.

Vietnam's macroeconomic factors are showing signs of recovery, and the outlook for the next 12 months includes the potential for a market upgrade, which could attract significant capital inflows and establish a new price level. In the short term, however, we may see some adjustments over the next 1-2 months.

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