Investors to take mature outlook

The big question is, how will local investors view this?

It is no accident that most closed-end funds set a five-year timeframe for the election of divestment. It represents a typical private equity investment’s life cycle from the early stage to exit and is sufficient time to realise its values. It is also long enough for investors to evaluate the fund managers’ capabilities.

Historically, no particular asset manager can maintain successes forever. Competition and market changes can easily outdate the initially agreed investment philosophies. In Vietnam, Dragon Capital has always been a headline grabber, the oldest fund, the largest net asset value (NAV) manager, the most successful story and the most respected culturally integrated foreign partners.

There is, however, one issue that cannot be avoided. The size of Dragon Capital’s funds is getting too large compared to the market, leading to the declined efficiency and new ideas to generate ‘abnormal’ returns are diminishing.

In the past three years, more new foreign funds have arrived at Vietnam, bringing new techniques and concepts to challenge the market. Dragon or Indochina Capital are now just two players among the hundreds, implying that investors can enjoy further diversification of benefits.

By all means, the increasing competitiveness of Vietnam’s stock markets is giving investors more power. As they have more choices, divestment is becoming a more common tool to engineer successes.
A majority of asset management firms operating in Vietnam opened after 2005.

Leading and reputed ones like Mekong Capital, Vina Capital and Black Horse made their presence in Vietnam around 2005 – 2007, which is approximately one cycle up to now. By the election, managers will face winding-up risks if they cannot persuade investors to continue with the same philosophy. The questions now are how much has the market changed and what worked a few years ago can still deliver results?

The biggest funds to date became successful from the equitisation of state-owned enterprises, buying ‘undervalued’ assets when local investors were ignorant and unknowledgeable. However, local investors are now much more sophisticated and the super profit opportunities are gradually disappearing. Many funds have even been unable to beat the indices. Investors are looking for new, brilliant ideas from newcomers.

The market seems to have overreacted with news of Indochina Capital or Dragon Capital’s woes. The key worries are the possible supply shock that could dampen the upward trend. This is reasonable in such an emerging market as local investors have never faced such decisions before.

Local investors will act more rationally with time, as divestments are as normal as investments. Funds should be considered as regular commodities where consumers can change tastes. Investors who exit funds will quickly join other asset managers and the cash will re-enter the market. Good stocks can always find owners so undervaluation will not exist for long.

Moreover, funds like Dragon and Indochina Capital are experienced enough not to sell everything during a short period of time. It could last as long as one year, so supply shocks will not exist. In 2009, when Indochina Capital divested its listed equity fund worth over $250 million NAV, indices even climbed.

To conclude, divestments should be perceived more positively for external investors. It is a sign of a more developed market model that Vietnam is approaching. Asset management is just a component of the market where demand and supply will make it balanced. This year and 2011 are predicted to generate a new cycle for the fund management industry in Vietnam.