First foreign fund liquidating from Vietnam

Vietnam is about to experience its first liquidation of a foreign fund since the country opened its stock market in 2000.

Indochina Capital Vietnam, a close-end Vietnam equities fund listed on the London Stock Exchange was unable to avoid liquidation as shareholders elected to realize its entire portfolio in an extraordinary meeting held in September 3.

About 67.7 percent of shareholders rejected a proposal from its board of directors to split the shares.

In July, Indochina Capital Advisors proposed that part of the fund be liquidated and the rest managed by Dragon Capital, another Ho Chi Minh City-based fund manager.

“We anticipated that the portfolio would be accepted and implemented. We are, therefore, disappointed that election for realization breached the threshold and that we will have to make an orderly realization of the entire fund,” said equities chief executive officer of Indochina Capital Advisors Beat Schuerch.

Schuerch said there were probably a couple of key factors that contributed to shareholders electing for realization. First, during the second half of 2008 Indochina Capital Vietnam, a unit of HCMC-based Indochina Capital Group, was trading at an abnormally steep discount while having a large proportion of the portfolio in cash and fixed income at the time.

As a result, the group’s fund drew unwelcome attention from arbitrage hedge funds specialized in exploiting such anomalies and pushing such funds into liquidation, he said.

“Those arbitrage hedge funds aggressively bought into Indochina Capital Vietnam since late September 2008 and have since increased the pressure on the board to push through proposals to allow realization of their shares at attractive prices,” the CEO stated.

He also said strong rallies on Vietnam’s equity markets over the past four to five months had increased the fund’s net asset value, making realization more attractive.

The fund’s liquidation was in synch with trends around the world as funds face the tremendous performance pressures of the economic downturn, he said.

Many major funds have either shut or merged over the past 12 to 18 months, leading to the demise of global flagship funds such as those from Cerberus Capital and Atticus Capital.

The US$500 million London-listed fund was started in 2007 as Vietnam’s equity market was on a bull run. But the exchange crashed in 2008 and Indochina’s performance suffered.

As of July 2008, the fund’s value had dropped by nearly half to $242 million after 16 months listed, according to a report released by the fund to shareholders. The 50- 60 percent drop in Vietnam’s stock market then coupled with the impact of the rising US dollar against the dong followed the collapse of Lehman Brothers.

The board suggested a proposal to form a joint venture with Dragon Capital to manage the fund in a move to defend its performance in Vietnam. The two fund managers reached an agreement in April and were waiting for approval from its shareholders.

But the realization has rendered the venture moot, said Schuerch.

He said the liquidation would have only a minimal impact on Vietnam’s stock market as the board would implement investment policies devised to avoid the indiscriminate selling of assets at fire-sale prices.

He also said there were no deadlines by when parts or the entire portfolio will be divested. However, he said a full and orderly realization would probably not last over 18 months, he added.

The group is in good financial health and on course for the second best financial performance in its history in 2009, according to the board.

The board condemned the liquidation to hedge funds while shareholders said the fund was in poor performance due to the actions of the board.

The group said the board continued to operate three real estate funds with a combined capital of $450 million from large financial institutions, including sovereign wealth and pension funds, endowments and family offices, and a series of Japanese funds focused on Vietnamese securities.

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Inevitable ending for a decaying financial institution.