Interview with Andreas Vogelsanger of Asia Frontier Capital Vietnam Fund
I had the pleasure to meet Mr. Andreas Vogelsanger, the CEO of the newly launched AFC Vietnam Fund while on his visit to Vietnam in March. Andreas was in HCMC on a full schedule of meetings with target companies, but he still managed allocate some time for me to ask him a few questions about his fund and thoughts on investing in frontier Asia, particularly Vietnam.
• What is so attractive about frontier markets in Asia?
They are mostly unknown, unheralded, and under‐researched, but Asia’s frontier markets have begun to attract investor interest as the region’s economies have grown and stock exchanges have soared. Countries like Vietnam, Bangladesh, and Sri Lanka have similar demographics to the tiger economies of the 1980s and 1990s but have the advantages of better technology and a more integrated trade environment than their predecessors. Today, Asian frontier markets – with their robust economic growth reflected in domestic stock exchanges – present an exciting investment opportunity that parallels the rise of China, India, and Thailand over the last few decades.
With foreign participation and correlation to world markets still low, frontier markets are a very appealing choice for portfolio diversification. These economies are being propelled by the growing class of domestic consumers who will continue to buy mobile phones, biscuits, and auto parts regardless of whether or not Janet Yellen reduces bond purchases. Countries like Bangladesh and Vietnam, which traditionally relied almost entirely on low‐value agricultural exports, are experiencing robust economic growth as disposable income levels rise and burgeoning industries develop in electronic parts manufacturing, textiles, pharmaceuticals, machinery, and chemicals.
• How do Asian frontier markets differ from China?
Frontier markets in Asia are going to be the growth story of the next two decades and investors are interested in getting in ahead of the crowd. Frontier markets in Asia offer the opportunity to invest in the ‘next China’ before stock and asset prices get pushed up. Every day in China you see entrepreneurs shutting down their factories in Guangdong province between Shenzhen and Guangzhou and moving them to Vietnam, Myanmar and Bangladesh. To me it seems strange that investors look for returns in China without paying attention to where the Chinese are putting their money. If anyone is going to be able to find the ‘next China’ it makes sense to me that the people that built China would have a good idea what to look for.
AFC believes that the big story for the next couple of years will be the shift of light manufacturing from China to places like Bangladesh, Cambodia, Myanmar and Vietnam. Global technology companies such as Intel and Samsung have already started to build hi-tech production factories in Vietnam. Samsung will manufacture about 40% if its mobile phones in Vietnam by 2015. Within various other countries also there are interesting developments taking place. Pakistan is expected to see further growth in its textile industry as it is one of the countries which has received favourable trade terms from the EU. Sri Lanka and Cambodia are seeing a massive growth in tourism, Iraq is rebuilding its economy and sitting on huge oil reserves, Bangladesh and Pakistan have one of the largest populations in the world and even the slightest increase in per capita income will lead to a dramatic shift in consumption.
Looking at Mongolia they have huge untapped natural resources and it is difficult to put a shovel in the ground there without discovering something valuable. Myanmar was formally the ‘rice bowl of Asia’ and has been attracting international attention as their economy opens up. The Asian frontier countries we invest in have a combined GDP of USD831 billion and a population of 572 million. Some people may not look deep enough to see the long term potential in these markets, but when you have done your research it is difficult to miss it.
• How can investors get exposure to these markets?
There are very high entrance barriers to trade stocks directly in Asian frontier markets and hence most private banks will not offer clients that service. It is therefore much more efficient to invest through funds. Asia Frontier Capital launched in December 2013 a new AFC Vietnam Fund which invests in small to medium sized listed companies, which is different to most other funds who only invest in large caps.
The AFC Asia Frontier Fund is probably the only fund who offers investors a way to gain exposure in 10 different high-growth Asian frontier markets in one shot. This fund was launched 2 years ago and primarily focuses on investments in consumer related stocks, financials and infrastructure.
• AFC Funds are actively managed, how is that different from buying a closed end fund or an ETF?
A key difference between a closed-end and an open-end fund is that the number of outstanding shares of an open-end fund can vary, whereas shares of a closed-end fund are fixed in number. An open-end fund will issue new shares, or repurchase old shares, as needed to meet investor demand, depending on whether money is being added to the fund or shares are being redeemed.
The per share price is determined by the net value of all assets (NAV) held by the fund, divided by the number of shares. The per share price of a closed-end fund however, is determined by the level of demand and offer and it therefore can either have a premium or a discount to NAV. For example in Vietnam, where closed end funds typically trade at a deep discount to NAV, open-end funds are by far the most popular among typical investors.
With an open-end fund, you can participate in the markets and have a great deal of flexibility regarding how and when you purchase shares. Also, you are never required to purchase shares at a premium or sell at a discount. Open-end fund managers have the flexibility to switch into cash in times of uncertainty or change their strategy in overweight more defensive stocks.
There is often a misconception, thinking that exchange traded funds (ETF) are always passive and track an index. In recent years there has been a growth in the number of active ETFs. In Vietnam however the situation is very special. ETFs typically have large assets under management and they all face the problem that they only can invest in liquid stocks or large caps, where the foreign investor limit is not yet full. This issue restricts their investment universe to only a few stocks and hence limits their diversification level. ETFs suffered from this constrain in 2013, where the Ho Chi Minh index went up 20% and ETFs hardly moved.
• What sectors should investors look to hold in their portfolio and what are some of the underlying drivers?
In Asian frontier markets consumer stocks are particularly attractive – these tend to be debt‐free local companies that pay healthy dividends and have huge valuation gaps relative to their emerging and developed market peers. Investing in consumer staples is an ideal way to gain exposure to domestic growth, as these companies provide cooking oil, soap, and food & beverage products to growing populations that are consuming more than ever due to rising disposable income. Consumer‐focused companies tend to be resilient to outside factors, as customers will continue to buy detergent and tobacco regardless of whether a protest occurs in the country. Additionally, consumer stocks are less vulnerable to political interference and government regulation than, say, energy or utilities.
Attractive consumer‐related stocks in these markets include a Bangladeshi shoe retailer with healthy free cash generation and return on equity that sells affordable footwear to its customers. This stock currently trades at a P/E of 16.1x, much lower than its regional peers. Another attractive consumer stock is a Vietnamese consumer food products company whose net income has almost doubled in the past five years and trades at a P/E of 9.0x with a dividend yield of 8.6%. These stocks reflect the kind of value that Asian frontier markets offer and are good ways to gain exposure to growing consumption in Asia’s frontier markets.
One of the key elements spurring frontier market growth is favourable demographics. The 10‐country, pan‐Asian universe in which Asia Frontier Capital invests had a combined population of 569 million in 2012, putting it third in the world behind China and India and considerably ahead of the United States and Indonesia. While labour pools are forecasted to shrink in Japan and Korea, the workforce is expected to grow by 35% in Pakistan, 31% in Cambodia, and 29% in Bangladesh between 2010 and 2020. This increase should buttress persistent economic growth as manufacturers capture the benefits of low‐cost labour, creating jobs and raising domestic consumption levels.
Asian frontier markets are also experiencing massive improvements in education, political reform, and economic development. Increasingly educated labour pools are helping these countries become more globally competitive. In Sri Lanka, secondary school enrolment increased from 56% to nearly 100% over the past three decades, helping the economy pivot away from the traditional mainstays of tea, coconuts, and tobacco and towards manufacturing, IT services, and logistics.
• What are your thoughts on market volatility in EMs over recent weeks – how is this affecting your strategy?
In general, frontier markets are relatively insulated – they tend to have low or negative correlations with global markets and are less affected by problems in developed countries. When the Federal Reserve announced recently that it would taper quantitative easing, it had a ripple effect across the globe, causing many financial markets to plunge and foreign currencies to slide against the dollar. Currencies in most Asian frontier markets, however, withstood the turbulence, and stock markets in
Bangladesh, Pakistan, and Vietnam outperformed neighbouring emerging markets like India, Indonesia, and Thailand. This is partially attributable to the relative obscurity of these stock exchanges, as foreign capital inflows to frontier markets pale in comparison to inflows to emerging markets.
• What is the near/medium/long term outlook for Asian frontier markets?
Asia’s frontier markets have experienced solid economic growth which is expected to continue. Across the 10‐country universe in which we invest, GDP growth averaged 7.2% in 2012 and is projected to achieve 7% this year. The IMF forecasts a 7% GDP compounded annual growth rate for these markets from 2011‐2018, outstripping BRIC countries. In aggregate, the combined GDP of AFC’s universe reached US $867 billion in 2012, comparable to emerging and developed economies (larger than Thailand, the Netherlands, and Turkey; just smaller than South Korea, Indonesia, and Spain). Investing through local stock exchanges is an ideal way to gain exposure to this opportunity, as most frontier countries have listed equities across multiple industries.
Remittance inflows have been an important contributor to growth. Millions of diaspora and overseas workers send money home to their families, supporting domestic consumption and investment. This ‘home country bias’ indicates that foreign workers tend to invest in their countries of origin, rather than the countries in which they earn their livings. Remittance inflows account for 10.8% of GDP in Bangladesh, 8.7% of GDP in Sri Lanka, 7% of GDP in Vietnam, and 5.8% of GDP in Pakistan. As access to finance and mobile banking increases, remittance inflows will continue to grow and drive economic growth.
Foreign direct investment (FDI) is surging into frontier markets to capitalize on rich endowments of resources, low labour costs, and growing consumer markets.
Frontier markets in Asia have enormous reserves of commodities, including oil (Iraq), liquefied natural gas (Papua New Guinea), copper (Mongolia), timber (Myanmar), and hydropower (Laos). Exxon Mobil’s US $19 billion LNG project in Papua New Guinea is slated to double the country’s GDP, and FDI has supported the boom in Mongolia’s mining industry. Iraq is experiencing an unprecedented oil boom, attracting energy companies from the US, China, and Europe. Alongside these natural resource projects, supporting industries in construction, real estate, infrastructure, and consumer products have sprung up as expatriates arrive and foreign cash flows in.
• What is your favourite country in the SEA region right now – why?
Our favourite country to invest in is clearly Vietnam. From a valuation perspective, Vietnam looks extremely compelling versus its regional peers, but listed “Small/Medium Caps” offer outstanding value. Reaching the old highs in the next economic and stock market cycle would mean a potential of several hundred per cent, supported by fundamentals.
Also growth prospects are huge, due to competitive labour costs but at the same time rising individual wealth at CAGR 13.50% over the past 10 years. According to Boston Consulting Group, Vietnam has the fastest growing middle class in Southeast Asia. There are more than four million Vietnamese living and working abroad. Thanks to them, foreign remittances are now over USD10 billion per year which puts Vietnam at the ninth highest position in the world, according to the World Bank. Another important contributing factor to support Vietnam’s growth are the foreign direct investments which reached USD11.5bn in 2013 and the market expects them to grow to USD13bn in 2014.
Let me just highlight a few other reasons why we think the time is right to invest in Vietnam now:
Sustainable GDP Growth – GDP is accelerating again at 5.8% (f) 2014, after declining from 8.5% (2007) to 5% (2012).
Competitive Labour Costs – Vietnam gaining strength in manufacturing as it takes on more electronic and textile manufacturing. The average monthly salary in Vietnam is USD117 versus China which is USD473.
Inflation under Control – The government managed to successfully lower inflation to 5.4% in 2013 (recent high in 2008 at 19.9%).
Interest Rates Came Down – Average lending rate came down from over 20% (2011) to 10.5% (2013).
Improving Trade Balance – Trade balance improved from a trade deficit of USD18bn in 2008 to a surplus of USD0.8bn in 2013.
Foreign Reserves Increasing – Foreign reserves increased from USD12.5bn (2010) to USD38bn (2013).
Stable Currency – The exchange rate has remained relatively steady, with the local currency depreciating against the US dollar by only 1.4% over the last two years.
But we also like Bangladesh very much. The country shows healthy exports plus they have impressive foreign remittances of around USD15 billion a year, which is clearly helping to maintain a positive current account balance. We think the textile industry will be benefitting a lot from higher wages in China. The average monthly salary in Bangladesh is USD73 versus China which is USD473. Ready Made Garment exports are over USD20 billion which is about 68% of all exports. Domestic industries such as pharmaceutical evolving well, often very well managed. Overall Bangladesh is still under-researched which provides great investment opportunities in the consumer and pharmaceutical industry.
• Vietnam has had its fair share of ups and downs since it joined the WTO, and more than one investor has been burned, what’s different this time?
The Vietnamese Government learnt from their past mistakes and is very serious about achieving a sustainable recovery. Their current monetary policy and economic stimulus packages are well thought through but arguably conservative. Critics are not happy about the speed of changes, and you keep on hearing from Government officials that they don’t want to rush it and that they prefer to do everything step by step. In my view this is the right approach, since changes need to come in bite sizes in order to digest them in order to achieve something. It seems to be a common mistake, especially in emerging markets, that politicians try to push through big changes too quickly, which often is a recipe for failure.
• Asia Frontier Capital has identified particular value in Vietnam, can you elaborate on this?
The Hanoi Index is currently at 90 points which is still less than one fifth of the index level reached during its peak in March 2007 where it stood at 459 points! Since then many companies in the non-financial sectors have been growing organically and as a result of this these companies are trading today at a huge discount to comparable emerging and frontier companies in Asia and globally.
Looking beyond typical large cap index stocks you can find incredible opportunities in small to midsized companies that have simply been overlooked. For example, we were able to invest in a debt free fast moving consumer good (FMCG) producer when the market capitalization of this company was smaller than the cash on its balance sheet! These kinds of valuations are only found at the end of year long bear markets as we have seen it in Vietnam from 2007 to 2012. To take advantage of this type of opportunity you need to be doing your research constantly and be able to move fast to put your money in. However, sometimes you need to accumulate a position in small amounts over time which is where my trading background comes in handy. This approach is one way Asia Frontier Capital differs from the big fund houses.
Along with the rest of the world, Vietnam faced some difficulties during the global financial crisis, but many of these have been worked through. We believe the recent actions taken by the Vietnamese government will help to solve the remaining problems and offer a solution to non-performing loans in the financial sector and the sluggish real estate market. The economy is stabilising as GDP growth has picked up in the last quarter of 2013 and Vietnam’s credit rating has also been notched up which reflects the improving economic conditions. On a macro basis the fundamentals are also very strong. The country has around 90 million people, a median age of 29 and a literacy rate of 93% yet the economy is half the size of Thailand which has a population of only 67 million. With greater emphasis on reforms in the state run sector as well as the growth of private enterprise in Vietnam we expect to see the country reach to where Thailand is today.
• Can you describe the investment strategy of your AFC Vietnam Fund and why you think you are different than your competitors?
There are probably two main differentiating factors. Given that our fund is still new and not as large in terms of assets under management as some of our competitors, we have the great advantage that our fund size allows us to capture attractive investment opportunities in the small and mid-cap segment. This is where we believe lots of value is, since the valuation of these stocks compares very favourably with regional peers. The other factor is our quantitative approach in employing our in-house earnings model to identify stocks we want to have exposure in. We then overlay a qualitative layer, where we do in-depth fundamental research on these companies. Prior to launch of our fund we tested this model for 12 months in 2013 and achieved a performance of over 80%.
Thanks to our investment style we are able to invest in a large number of companies, we are currently invested in 65 companies, and this has the distinct advantage that we don’t run a concentrated risk in any one stock and hence we are able to get out of our holdings much more easily if that should be required.
• After an extensive career in private banking and investment banking, what led you to setup AFC Vietnam Fund?
The setup of AFC Vietnam Fund was actually a joint decision between Andreas Karall, our Chief Investment Officer, Thomas Hugger, our COO and at the same time the founder of Asia Frontier Capital and myself. It was always my dream to be an entrepreneur and to run an investment fund together with a team of well trusted and highly qualified people. I am a strong believer in combining skills will create a “winning team”. It is a real pleasure to work with motivated colleagues who all are working towards one goal, to make our clients happy.
I am now based since over 8 years in Asia but since the early start in my career over 25 years ago, I was always investing in various Asian markets mainly on behalf of clients or for myself. Over the course of the years there were always smaller or bigger investment opportunities, but what we are seeing evolving in Vietnam looks clearly incredibly compelling. This is why the three of us decided to launch the AFC Vietnam Fund to offer likeminded investors access to this market.
About Andreas Vogelsanger: He has worked over 25 years in Finance for various institutions, such as Investment Banks, Hedge Funds and Private Banks in Zurich, Geneva, London, Hong Kong, Singapore and Bangkok. He has been investing in Asia since 1985. He is the former Chairman and Founding Partner of EVK Capital and was previously a Managing Director of Bank Julius Baer. He also held senior investment positions at Coutts Bank in Asia and D.E. Shaw in London. He is also a Certified European Financial Analyst and Portfolio Manager (CEFA), holds a Financial Risk Manager diploma (FRM) and was awarded an AMP diploma from Wharton Business School, University of Pennsylvania.
By Marc Djandji
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