Not many are familiar with investing in Vietnam’s debt market, but the investment environment for Vietnam’s local currency debt market has steadily improved, according to Dan Svensson, portfolio manager at Dragon Capital.
The coupon tax for Vietnam’s debt is 5%, while the trading tax is 10 basis points (bps) one-way of market value.
What’s more, daily trading volumes in government bonds have come up to more than $300 million from $30 million in the last five years.
Citywire AA-rated Svensson, who manages the Dragon Capital Vietnam Debt fund, told Citywire Asia that government bond trading – where the fund has a general mandate –, has contributed to more than 50% of the fund’s performance in most years.
‘The trading volume in these have normally been between 400% and 600% of net assets value and we always apply stop-losses,’ he said.
While the government bond market beyond 10 years has very volatile liquidity and could suddenly dry up, the market in the less than five years tenures is generally quite liquid.
In terms of performance, a passive one-year maturity government bond strategy would in gross terms have delivered around 4.5% per annum in US dollars since 2007, Svensson said.
Launched in December 2007, Dragon Capital Vietnam Debt fund is a dedicated fixed-income fund that focuses on Vietnam’s local currency debt market.
Internally, the fund’s investment team compares the fund’s performance with five indices, namely the Dragon Capital market cap index, and one-, two-, three- and five-year government bond indices, Svensson said.
‘Our internal objective is to be ahead of at least four of them. This we have achieved eight years out of 10,’ he said.
After selling all duration risk in late February and early March, the Dragon Capital Vietnam Debt fund is 80% invested in short corporate papers.
While the corporate bond market has very limited liquidity and transparency for now, important milestones to watch in the next two to three years will be a rating agency and the emergence of pension funds.
Svensson said the fund’s average holdings of government debt has historically been around 60%, with the remaining assets in corporate papers – including convertible bonds.
Ideally, the fund prefers to have a small fraction of between 2% and 5% in convertibles to achieve equity gamma, he said.
The Dragon Capital Vietnam Debt fund, which is listed on the Irish stock exchange, is targeted mainly at family offices, international development organisations and insurance companies.