Q. Dear Sven,
In one of your previous articles, you explained the potential benefits and pitfalls of buying stocks on the stock exchange in Vietnam. You also mentioned a few companies that could potentially produce attractive returns for investors.
I am a novice investor and do not have the time for my own portfolio management. I am also afraid that holding individual stocks might not diversify my investment portfolio sufficiently according to my risk profile (I don’t like taking too much risk), and would leave me prone to experiencing losses that I would like to avoid.
I have read that mutual funds and Exchange Traded Funds (ETFs) give beginners easier, less risky access to financial markets. Could you explain a bit more about these, and which options I could potentially access locally and internationally?
Sven Roering, Managing Partner at Tenzing Pacific Investment Management, advises:
A: Hi Lewis,
Your question is extremely relevant to any individual with any form of investable capital available to them, as mutual funds and ETFs have become extremely popular options for savvy portfolio management, both in Vietnam and abroad.
Mutual funds and ETFs are both collective investment vehicles. In the days before collective investment vehicles, individuals would access financial markets mainly through a stockbroker and hold a few individual stocks which a broker would sell to them without any consideration for their risk profiles or return objectives. This led to a market situation where too many individuals, unsophisticated investors participated directly in the market, traded mainly on rumors and speculation, which lead to asset bubbles and subsequent market collapses – such as the Wall Street crash of 1929.
Mutual fund 101
A mutual fund is set up by a group of professional investors who agree to buy company stocks or any other investable securities according to a strict set of rules. The rules dictate the level of risk the portfolio manager will be able to take on the investment, as well as the type of securities he or she will be able to buy.
Mutual funds will usually comprise of securities purchased using capital provided by those who manage the fund, and the fund will also be open to the public to allow outside investors to purchase a share of the fund and enjoy a proportion of the returns.
You can buy shares or ‘units’ in local funds which invest in stocks and bonds in Vietnam. An advisable option is the Vietnam Equity Fund managed by Dragon Capital. This fund is UCITS-compliant, which means it conforms to European regulatory and disclosure standards. You could buy units directly through the company, or on various fund platforms available globally.
If you would like to buy shares or units of funds internationally, you could do so through platforms such as insurance wrappers or fund supermarkets, which would be available from your independent financial adviser.
ETFs operate in a similar manner to mutual funds. However, instead of investors buying units or shares from the company which operates the fund, shares of the fund are traded publicly on a stock exchange, just like any company share.
The price of an ETF share is therefore subject to the laws of supply and demand (whereas the price of mutual fund shares are directly related to the value of assets held in the fund). With an ETF, the assets currently held in the ETF could have a relatively high value; but if other investors believe that the price of these assets will fall in the future, this will have a negative impact on the current price of that ETF share. When it comes to a mutual fund, on the other hand, if the assets currently held in a fund have a relatively high value, the value of one share in the fund will be proportionately high.
An example of a ETF listed in Vietnam is the SSIAM HNX 30, managed by Saigon Securities. The fund aims to track the performance of the 30 biggest companies listed in Hanoi. You will often find that many mutual funds will hold ETFs in their portfolios.
Mutual funds and ETFs are fantastic options for novice (and even experienced) investors to save and compound wealth over the mid-to-long-term. However, as with any investment, it is important to conduct the necessary due diligence on the specific aspects of a fund before investing. When choosing a fund, it’s critical to use research from third-party sources to assess the experience of the fund manager, strategy, investment holdings and historical risk-adjusted returns.
For independent, professional financial advice, don’t hesitate to get in touch with TPIM for private wealth management across Southeast Asia and beyond: http://tpim.co/contact-us/.