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Vietnam Holding On Vietnam’s Upcoming Removal Of Foreign Ownership Limitations

Vietnam will remove the foreign ownership limitation this September, allowing foreign investors to own 100% stakes of companies in certain industries. This event will serve as a major catalyst for increased foreign investment in Vietnam, and its future upgrade to an emerging market. I had the pleasure of interviewing Ezra Vontobel and David Kadarauch of Vietnam Holding Asset Management to gain further insight on the removal of the FOL in Vietnam next month. September 2015 marks the beginning of significant change for investment in Vietnam, as the foreign ownership limitation will be removed, allowing foreign investors to own 100% stakes of companies that were previously limited to 10-49% foreign ownership. Foreign investors have previously been willing to pay a premium of up to 20% for highly desired companies, such as Vinamilk, which have full foreign ownership. This event will serve as a significant catalyst for increased foreign investment in Vietnam, which is currently not the most sought after destination in Asia for foreign investment. I am personally very optimistic about Vietnam’s economic future, and believe the current potential of Vietnam is being relegated, as Asian hedge funds are focusing more on other countries in this region. While the removal of the FOL will not be fully implemented in September and the procedures for removal are still not entirely clear, this is certainly a significant step for Vietnam, and will help increase its status from a frontier to emerging market. There will still be restrictions within certain industries, such as the banking industry. Next month simply marks the initiation of changes necessary for Vietnam to allow foreign investors to have full ownership of companies. I had the pleasure of interviewing Ezra Vontobel and David Kadarauch of Vietnam Holding Asset Management to gain further insight on the removal of the FOL in Vietnam next month. Vietnam Holding is an investment company with shares listed on London’s AIM Market and Frankfurt’s Entry Standard. The company is a value investor that incorporates environmental, social, and governmental standards in investment. The company’s high emphasis on creating social value is further edified by the Vietnam Holding Foundation, which supports projects including arthroscopic surgery training and an orphanage based in Thailand. The company currently has approximately 20% of its assets invested in companies that are fully held by foreign investors, including Vinamilk, DHG Pharmaceutical, FPT Corporation, and Viconship. Dylan Waller : In addition to specific industries not removing the foreign ownership limitation, specific companies may also decide not to open up additional shares to foreign investors. Can you predict companies that may react in this manner, and the reasoning behind it? David Kadarauch : Each company’s controlling individual(s) will have his/her own views, based simply on attitudes to foreigners as much as anything else. Also, companies with a big SCIC stake might be less likely to move to a FOL rise. Waller : Do you anticipate a sharp rise in stock prices of companies fully held by foreign investors this month, as a result of domestic investors rushing to buy before the FOL is removed? Kadarauch : Case by case only – not generally. Waller: Do you see the removal of the foreign ownership limitation as a major catalyst for an increased entrance of investment from Asian hedge funds? Kadarauch : Yes – as long as progress on codifying the new law’s sector-by-sector guidelines is reasonably efficient, and results in a significant new percentage of market cap being freed up to foreigners. Waller : With the removal of the FOL coming in September, other investment opportunities may be relegated, as attention will be focused on companies that are currently fully held by foreign investors. As a value based investor with approximately 20% of your portfolio currently invested in companies fully held by foreign investors, do you see equal or even greater value in other high growth companies with lower valuation, such as Hoa Phat Group or Petrovietnam Drilling and Well Services? Ezra Vontobel : There are plenty of interesting stocks on attractive valuations in Vietnam’s ca. 700-company stock exchange. VNH owns the two you mentioned. Waller : Do you think that the Thai model of Non-Voting Depository Receipts will ever emerge in Vietnam, specifically as a solution for foreign investors to invest in companies in the banking industry? Vontobel : It would make sense to us for Vietnam to have such a system, but it doesn’t look to be currently on the table. We say it would make sense because ultimately foreign control is what FOLs are designed to prevent, and a well-designed NVDR system, where NVDRs could be voted by management in contested votes, would fulfill the objective, while freeing up the market for foreigners who don’t mind not having a vote (some, but not all). Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

An Exceptional Bond Fund For Improving Risk-Adjusted Portfolio Performance

Summary The Vanguard Short-Term Corporate Bond Index ETF is everything I would hope for in a short-term corporate debt exposure. The ETF has low volatility and low correlation with other important investments. The credit quality is respectable without being so high that it eliminates most of the yield. Using this fund as part of a diversified portfolio makes it shine. The Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ) is simply a great fund. I wish I could start more articles out with comments that are this positive. This fund is simply great. The yields are severely limited since this is short term debt with respectable credit quality, but the ETF on the whole is just exceptional when it comes to being part of an effective portfolio. Credit The following chart shows the credit quality breakdown. When it comes to a corporate bond fund there are two ways that I like to see the weightings. Either I would want a junk bond fund or I would want one with a credit breakdown similar to this. Personally, favor combining a fund like this with quite a few other bond funds to create a more complex group of bond holdings. Duration The following chart breaks down the duration of the funds. Holdings are almost all less than 5 years and usually more than 1 year. Again, this is a solid choice. If an investor wants to load up on even shorter term bonds, there are funds designed specifically for that. It is difficult to find a useful yield level on those ultra-short bonds so this is a reasonable portfolio composition. Sector The following chart breaks down the sector allocation: This sector allocation may seem absurd if an investor looks at numbers without reading the names. The names of the sectors indicate that rather than breaking down the market into all the corporate sectors, Vanguard is containing several other bond sectors that are not relevant to corporate debt. It wouldn’t make sense for this fund to have an allocation to foreign debt issues or MBS. My hypothetical portfolio, shown lower in the article, picks up those allocations through other ETFs. A Hypothetical Portfolio I put together a very simple sample portfolio using Invest Spy. Due to some of the ETFs being newer the sample period is limited to a little over two years. (click to enlarge) This hypothetical portfolio is weighted to 60% equity and 40% bonds. To break that down the weights from the equity section are 30% total market index (NYSEARCA: VTI ), 10% equity REITs (NYSEARCA: VNQ ), 5% Utilities, 5% Consumer Staples (NYSEARCA: VDC ), 10% International Equity. The bond section is holding 10% in junk bonds (NYSEARCA: JNK ), 5% in extended duration treasuries (NYSEARCA: EDV ), 5% in emerging market government bonds (NASDAQ: VWOB ), 5% short term corporate debt , 5% in short term government debt (NASDAQ: VGSH ), 5% in mortgage backed securities (NASDAQ: VMBS ), and 5% in intermediate-term corporate bonds (NYSEARCA: BIV ). This portfolio won’t be perfect for hitting the efficient frontier, but it should beat the vast majority of real portfolios investors are using on a risk adjusted basis. If long term rates were higher I would have used a higher weighting for long duration bonds due to their exceptionally correlation to major equity classes. My disclosure already states it, but I’ll reiterate that I am long VTI and VNQ. Annualized Volatility When measuring risk adjusted returns for a portfolio the most efficient method is usually to use the Sharpe ratio. For that ratio we are taking the total return annualized return and subtracting the risk free rate. Then we divide the resulting number by the annualized volatility. The problem is that this metric is only really known after the fact. Predicting the level of returns in advance is problematic but correlations and relative volatility are more reliable over time than returns. Within the chart investors can see the annualized volatility of each holding as well as the resulting annualized volatility for the portfolio. While some holdings have higher annualized volatility scores, such as EDV, the ETF makes up for that by having negative correlation to a few of the equity holdings. As a result, the ETF only contributes .6% of the total risk in the portfolio. VCSH has an annualized volatility of 1.8%, which is not bad at all. Once we adjust for correlation the risk contribution is extremely low. That means VCSH fits extremely well in this kind of hypothetical portfolio. The expected returns are not going to be very strong since this is short term corporate debt, but for an investor trying to achieve superior risk adjusted returns relative to the SPDR S&P 500 Trust ETF ( SPY), this is a great holding. It will usually underperform SPY, but it will result in material reduction in total portfolio risk. Correlation I want to dive a little deeper into the correlation statistics. The table below provides the correlation across each of those ETFs which should make it very quick to see which ones are work very well together. When a correlation is shown in the tan color it indicates a negative correlation which is very attractive for reaching the efficient frontier. You’ll notice that quite a few of the bond funds have negative correlations to VTI and the S&P 500. Since VTI and SPY have a correlation ranging between 99% and 99.9% depending on the measurement period, it should not be surprising that those two funds have very similar correlations to other holdings. Here is the correlation table: (click to enlarge) Conclusion When the ETF is placed within the context of a portfolio that is heavy on U.S. equities it looks like an intelligent way to reduce the overall risk of the portfolio. When it comes to generating alpha, I’ve often told investors that the secret to reaching alpha is to focus on reducing risk. Most other investors are already focused on trying to maximize their returns and many will take on more risk than they can handle. Focusing on risk reduction reduces the incentives for an investor to sell off after a big loss and makes it easier to generate alpha relative to the S&P 500 because it is easier to reduce risk through superior diversification. Disclosure: I am/we are long VTI, VNQ. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Avoiding Panic: Keep Your Head And Look To Short Volatility

U.S. stock market performance has taken a turn for the worse in the week of August 17. Volatility has risen dramatically for several reasons, including China currency actions and expectations for near-term Fed action. SVXY, the ProShares Short VIX Short-Term Futures ETF, has taken a hit as volatility has spiked to levels not seen since 2011. Rising volatility represents an opportunity to find an attractive entry point in SVXY. The U.S. stock markets have proven remarkably tame in 2015 until the recent volatility in August. From the beginning of the year until the middle of August, the S&P 500 had risen 1.6%. However, this past trading week, from August 17 to August 21, the S&P dropped almost 6%, leaving the index at a 4.3% loss for the year. While market reactions can never be predicted in advance, the pundits can often retrospectively flag the reasons, namely China’s currency actions, North/South Korea war games, the Iran deal, you name it. During this same week, volatility, as measured by the VIX, sky rocketed, starting the week at the mid-14s and rising to nearly 28 at the close of regular trading hours on Friday, nearly doubling. The VIX rose more than 45% on Friday alone. ^VIX data by YCharts At this level, the VIX is reaching territory not seen this year, and looking back, not since 2011. ^VIX data by YCharts While spikes in the fear gauge are event-driven, in the background, the U.S. economy is chugging along, with slow but moderate growth, the hallmark of the economic recovery over the past 5-6 years. US GDP data by YCharts This slow but steady economic growth, along with the decrease in unemployment rate , creates positive long-term economic trends for the U.S. We have been in a bull market for a number of years, and the rise in employment, along with the rising dollar creating lower priced foreign goods, should continue to provide for slow but steady economic growth. Therefore, the spike in the VIX represents, yet again, an opportunity to trade in volatility and seek to capture short-term gains. While there are several ways to play this, my preferred approach is to trade in the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ). SVXY dropped over 16% on Friday August 21, to 70.39. While this is not a low for the year, as a short VIX vehicle, traders can opt to stage their buys into SVXY to capture the eventual decrease in volatility when the latest threat blows over. Now the “pressure” on SVXY to rise or fall depends on contango or backwardation, and several Seeking Alpha authors have written great articles about them, so there is no reason to summarize the issue further. Looking at contango or backwardation is the logical approach for short-term traders and after the dramatic rise in volatility, the VIX will be backwardation. While SVXY is generally viewed as a short-term vehicle, there is no denying that over its history, a 5-year buy and hold would have generated great returns. SVXY data by YCharts However, the volatility of this volatility vehicle is outstanding with the potential for significant draw-downs. It would require immense discipline to hold SVXY for the long term, given human behavior – you would literally need to put money away with no access possible for a decade or more. But if done, it could be highly profitable – and one great article suggests that over the long term, if one could hold and avoid trading in SVXY, huge amounts of wealth could be generated. While each investor needs to invest according to his/her own philosophy, timeline and risk tolerance, seeking an opportunity in SVXY when it spikes has proven to be worth a look. Disclosure: I am/we are long SVXY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.