Ian Cowie: why I have sold this trust, and bought more of its rival

Our columnist no longer has exposure to two investment trusts operating in the same region. Here he explains why.

It’s an ill wind that blows no good, but the law of unintended consequences can prove profitable for investors who are willing to look left when everyone else turns right. For example, a relatively small economy where few British shareholders have any exposure has seen exports soar since the start of the Covid crisis, boosting returns from investment trusts focused there.

To be specific, according to the US Census Bureau, its official statistical agency, Vietnam’s exports to America have increased by more than 150% since the virus was first identified in China. Mass lockdowns in the latter country - and its trade war with America - have also helped Vietnam because global businesses, such as the technology giant Apple (NASDAQ:AAPL), are transferring some manufacturing from China to this ‘frontier market’.

That phrase, which describes an economy at such an early stage of development that it does not even qualify as an ‘emerging market’, should serve to alert potential investors to the risks involved. But, as I know from personal experience, the rewards are also worth considering.

This small shareholder first bought stock in Vietnam Enterprise (LSE:VEIL) at £4.04 in July 2018, as I reported elsewhere at that time. By September last year, its share price had exceeded £7 before it began its long slide down to trade at £5.44 this week.

Given the volatility of the Vietnamese market, I would probably have been content to sit out this setback and await recovery - had it not been for another important development in global stock markets during the last year. Rising inflation and interest rates around the world mean that ‘jam tomorrow’ stocks, which pay low or no dividends, have fallen from favour, as discussed here several times in recent months.

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While none of us knows what will happen next to this newish trend in financial fashion, I strongly suspect that dividend income will be increasingly important in determining equity valuations for years to come. Bear in mind that the ‘growth at any price’ mania fuelled by quantitative easing (QE) and cheap credit lasted for more than a decade after the global financial crisis.

This might be bad news for VEIL because it yields precisely nothing by way of dividend income. Growth funds are fine while they are growing but, when prices fall, there is no cash comfort for shareholders to pay us to be patient.

So, while remaining very happy to have sold all my China shares a couple of years ago after learning about the atrocious treatment of its Muslim minority, the Uighurs, I began to look around for alternative exposure to Asia. That’s when I noticed that VinaCapital Vietnam Opportunity Fund (LSE:VOF) has delivered the top returns in the Association of Investment Companies (AIC) ‘Single Country’ sector over all three standard periods of comparison.

To be specific, VOF achieved total returns of 339% over the last decade, followed by 51% over the last five years and then -20% over the last very difficult year. By contrast, VEIL does not yet have a 10-year track record with the AIC, having listed in London in 2016, although it achieved 33% total returns over five years before shrinking by 30% over the last year, with all statistics supplied by Morningstar.

Meanwhile, VOF currently yields 3.3% income, having increased its dividend distributions by an annual average of 12.9% over the last five years. If that rate of ascent is sustained, which is not guaranteed because dividends can be cut or cancelled without notice, VOF would double shareholders’ income in less than six years.

Better still, VOF shares remain priced 21% below their net asset value (NAV), while VEIL trades at a tighter discount of 16% to its NAV. Another consideration is that VOF’s ongoing annual charges - as calculated by the AIC - are 1.5% compared to VEIL’s 1.9%.

To be fair, VEIL imposes no performance fees, whereas VOF might do so, and I was also impressed by the response of VEIL chairman, Dominic Scriven OBE, when this small shareholder raised my concerns with him.

Scriven told me that: “The VEIL board do periodically assess the merits of a dividend, but they believe that with Vietnam being a high-growth market, the company’s reinvestment of income is likely to generate greater long-term returns for shareholders than paying a dividend.

“Also, the companies in VEIL’s portfolio typically reinvest their own earnings to support further growth, rather than paying dividends. Consequently the dividend yield on VEIL’s holdings in 2021 was just 0.7%, while their average earnings per share (EPS) growth was 57%, supporting VEIL’s NAV to rise by 47% versus 39% for the index.”

Scriven also highlighted the potential tax disadvantages of dividends for some investors - which another senior fund manager, Terry Smith, has set out on several occasions - and flagged up the fact that VEIL is focused on listed shares.

But tax is less of an issue for this investor, who holds nearly all my shares in ISAs and self-invested personal pensions (SIPPs), while I have also found that unlisted smaller companies - such as those held by VOF - can deliver big returns.

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That theme was taken up by Andy Ho, chief investment officer of VOF, who told me: “This company offers investors a unique vehicle to participate in Vietnam’s dynamic economic growth story.

“This is a young country with a population of 100 million and a fast-growing middle class. VOF was launched in 2003, is a £824 million fund listed on the London Stock Exchange main market and a FTSE 250 index constituent.

“We are long-term investors with 16 core holdings in our listed portfolio, many of which originated as private opportunities. We believe that some of the best investment opportunities in Vietnam are those that are not available on the open market and investing when they are private enables us to conduct due diligence and negotiate important terms around performance and exits.”

So, with some misgivings about whether I am being greedy, I sold all my VEIL shares - which comprised more than 2% of the ‘forever fund’ - at £5.42 last month and reinvested the money in VOF at £4.26 just in time to qualify for its next dividend due on 5 December.

Whether that proves the right thing to do remains to be seen but at least I can look forward to a high three-figure income before Christmas.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL) and VinaCapital Vietnam Opportunity Fund (VOF) as part of a diversified portfolio of investment trusts and other shares.