From the December 2007 issue of Wealth Manager Web • Subscribe!

Peaceful Invasion

Earlier this year, Intel began building a $1 billion semiconductor plant. At 500,000 square feet, it is expected to be the company's single largest manufacturing facility. But this isn't happening in Silicon Valley. Thirty-two years after the last American troops were airlifted out of Vietnam, the California-based chipmaker broke ground on its new facility in Ho Chi Minh City.

When Americans refer to the Vietnam Era, they usually mean the 16-year period in which the U.S. fought a bitter, largely guerrilla war for control of South Vietnam. But that--as they say--was then. As far as international investors and economists are concerned, the Vietnam Era now represents the rapid expansion of the country's economy. In the last couple of years, Vietnam has become one of the hottest emerging markets in the world, and financial analysts see it as the kind of play that can diversify portfolios whose overseas strategies are dominated by Brazil, Russia, India and China--the so-called BRIC countries.

"We got into Vietnam a few years ago because we were looking for diversification," says Thomas Seto, a Seattle-based manager of the $1.2 billion Eaton Vance Tax-Managed Emerging Markets Fund, which grew 32 percent in the last year and has at least 12 percent invested in frontier markets, including Vietnam. "We look at Vietnam because we take a broad approach and emphasize smaller countries, which are generally low cost and low volatility relative to larger countries," Seto says.

Despite a brief hiccup in the middle of 2007, the Vietnam stock index has been on a roll, and the country's economic expansion has been extraordinary. In 2006, it was the best performing stock market in Asia, outpacing China. That year, Merrill Lynch identified Vietnam as a 10-year buy, and the chief economist of the International Monetary Fund called Vietnam "an emerging China" because of its "strong rates of growth." In fact, Vietnam's economy grew by 8.2 percent in 2006 and has grown by more than 7 percent annually since 2002. According to initial estimates, Vietnam's economy will swell by 8.4 percent in 2007, making it Southeast Asia's fastest expanding economy.

"People like to call Vietnam the next China, but we see it as the next Japan," says Eric Stevens, the chief executive of SourceVietnam, which is working with the government in Hanoi to lure international investors. "Ninety-three percent of the country is literate, each year 40,000 to 50,000 new technical workers enter the job market, and the median age of the population is 25."

Nevertheless, the most significant event in this economic story took place in January 2007 when Vietnam became the 150th member of the World Trade Organization--the first new entrant since Saudi Arabia was admitted in December 2005. Vietnam had aspired for WTO membership for almost 12 years. To gain the coveted entry, Vietnam had to impose reforms, including privatizing government-controlled businesses, removing import barriers and changing its legal system----like intellectual property laws--to meet international standards.

Privileges of Membership

For Vietnam, membership has had its privileges. Consider the sudden change in the country's textile industry following its admission to the WTO. Instantly, the United States, which had quotas in place on Vietnamese clothing imports, was forced to drop those barriers. The result: Manufacturing in the country immediately picked up and garment exports out of Vietnam increased 32 percent within a few months. Now, textiles have surpassed oil to become the country's largest export, and Vietnam is one of the world's top 10 garment exporters.

At the same time, WTO membership has led to a surge in foreign investment. In 2006, the year leading up to WTO admission, foreign direct investment was $10 billion--projected to reach $14 billion by 2007. In November 2006, Commerce Secretary Carlos M. Gutierrez arrived in Vietnam with a delegation of American business leaders. It was the first U.S. mission there. At the time, Gutierrez visited Hanoi and Ho Chi Minh City and called the country "the next great U.S. business opportunity."

International investment advisors seem to agree. Asian equity analyst Christopher Wood, the global strategist at CLSA--the Hong Kong-based brokerage majority-owned by French bank Credit Agricole--says investors should start getting into the Vietnamese stock market today and hold on for the long term. (Wood is something of a star among financial analysts these days because he is the first strategist to have predicted the U.S. subprime crisis. As early as October 2005, his weekly client blog "Greed & Fear" warned investors to get out). Wood recommends that investors have an Asia-excluding-Japan portfolio, and that those portfolios should have about 3 percent in Vietnam. "Vietnam holdings could see multiples of 20 times," Wood projects.

Another prescient investor who has taken a position in Vietnam is Mark Mobius. At the end of 2006, Mobius, who oversees more than $30 billion in emerging-market equities for Franklin Templeton Investments, launched the Templeton Emerging Markets Small Cap Fund which focuses on under-tapped markets like Panama, Peru and Vietnam.

"With a population of more than 85 million, Vietnam is one of the world's fastest growing economies with an average GDP growth rate of 7.5 percent in the last five years," says Mobius, who points out that--thanks to the 2001 trade agreement with the U.S. and the more recent WTO membership--the government expects growth to be between 8 percent and 10 percent annually through to 2015.

"Foreign investment is booming. FDI rose to more than $10 billion in 2006--nearly 50 percent higher than 2005," Mobius adds. This growth is expected to continue with 2007 FDI estimated to reach $20 billion as a result of greater globalization and investor attraction to this fast growing economy. Foreign exchange reserves have also witnessed significant growth in the last 20 years. Reserves totaled $14 billion at the end of 2006, compared with just $2 billion, 10 years ago. "Strengthening the country's fiscal position, the growing reserves can also cushion the economy from any major external shocks and allow the government to focus on implementing much needed reforms," says Mobius. "The market's growth outlook remains exciting. However, the recent rush of fund flows has pushed the stock market to levels which we believe to be excessive and has led to expensive valuations. Thus, we continue to monitor the market for investment opportunities," he says.

Barriers Remain

Still, it's not easy to get into the Vietnamese stock market. One problem is that the Ho Chi Minh City Exchange is less than eight years old, and the breadth of its offerings is limited. There are only about 109 companies listed on the index today. (Government officials have been drawing up plans to sell shares of several state-controlled companies, leading experts to forecast that the number of targets on the exchange will jump significantly over the next couple of years.) Regulations are also an obstacle. Foreign investors are prevented from owning more than 49 percent of a listing's equity; for bank stocks, the limit is 30 percent. In addition, there are restrictions on foreigners who want to buy Vietnamese equities. Investors have to set up local bank accounts and use a security company that's registered in the country.

There are other ways to participate in the Vietnam boom, however. You can buy into closed-end funds that are listed outside Ho Chi Minh City in markets like London, Dubai or Ireland. Dragon Capital Management, which is based in Ho Chi Minh City, has a few funds listed on foreign exchanges, such as the Vietnam Enterprise Investment Limited. VEIL is the largest dedicated offshore fund focused on Vietnam, and if it weren't for the government, it would be the biggest investor in the country's stock market. Another closed-end fund listed outside the country is the Vietnam Opportunities Fund, which was set up in Hong Kong in November 2006 by JF Asset Management Ltd., a unit of JPMorgan.

Still, many financial advisors are not in the business of purchasing select closed-end funds which usually come with high fees and require attention. "I'm not really aware of how to invest in Vietnam," says CFP Tim Kochis, the chief executive of Kochis Fitz in San Francisco, who earned a Purple Heart for his service during the war. "I'm completely unaware of the opportunities there, but that's because we're not stock pickers. We don't choose specific stocks and specific countries. We're comprehensive wealth managers who look for broadly diversified investments."

One way for advisors to get a piece of Vietnam is through emerging market funds. Many of these fund managers have been busy getting exposure to the Southeast Asian country. But they do this in an indirect way. The common method for emerging market fund managers is to sprinkle their funds with American, European or Asian companies that are doing business in Vietnam.

Gregg Wolper, a senior mutual fund analyst at Morningstar who follows emerging markets, says fund managers have an appetite for Vietnam-related holdings because of the tremendous performance of the Vietnamese stock market and because of events like the Asia-Pacific economic conference, which the country hosted for the first time in November 2006.

"Emerging market managers--and mutual fund managers with emerging market investments--are looking for ways right now to broaden and diversify their portfolios," Wolper says.

One fund that's invoked this strategy of second-hand investing is the Driehaus Emerging Markets Growth Fund, one of the best performing funds of its kind. Rather than investing directly in Vietnam, it's invested in businesses that are invested in Vietnam. One of its holdings is Asian Pacific Breweries, which is listed on the Singapore exchange and owns a majority of Vietnam Brewery. That beer maker has an 85 percent market share in Vietnam.

"While Vietnam's economy is doing well, it's almost impossible to buy broad-based exposure," says Brad Aham, who is the manager of the $2 billion emerging markets fund at State Street Global Advisors in Boston and has been taking positions in other countries to capitalize on Vietnam's expansion. "We don't have any direct holdings in Vietnam right now. What we do own is a number of companies that are positioned to benefit from Vietnam's growth through their investments."

Aham says he has specifically targeted a number of Korean companies that are upping operations in Vietnam. One such company is SK Telecom. That company is the dominant mobile phone service provider in Korea and is becoming a big player in the Vietnamese cell phone market. He also likes Korean construction companies that are undertaking large engineering projects in Vietnam.

"These don't represent pure plays on Vietnam, but they do buy us exposure to what's going on there," Aham says. "Investors should try to benefit from Vietnam's growth, but it's likely to be indirect for now and should be diversified."

Mark Francis Cohen (mfc@markfranciscohen.com), whose work has appeared in the Washington Post and the New York Times, is a Washington, D.C.-based journalist.

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