Toshihiko Takamoto is lead manager of the DIAM VIP Focus Fund. The $230m fund was launched in May 2007 and while it invests at least half of its assets into these three markets, it does still have the chance to play the China story. At the time of launch, with India and Chinese stock markets both still booming, DIAM’s team assumed that investors already had ample exposure to the big two emerging countries and their respective markets. They concluded that the next wave of potential growth in Asia would come from the markets on Vietnam, Indonesia and the Philippines.
Why does DIAM think Vietnam, Indonesia and the Philippines could be a good combination right now? Takamoto explains, “To begin with, they have large populations. Indonesia has 230 million people, the Philippines 83 million and Vietnam nearly 80 million. On top of that, the average age is low, less than 25, so you have a large, young and cheap labour force.
“In the VIP markets, the influx of investment from overseas, which is indispensable for economic growth, has quickly grown in recent years. If the accumulation of capital continues in this way, an even longer period of growth can be expected. We expect these markets to follow a similar growth path to China and India. GDP per capita is very low still, in the range of 700-1700 across the three economies. VIP’s GDP per capita is approximately the same as Japan when it was during its high-growth period, and VIP is only in the initial stages of growth.”
The Philippines is surprisingly accessible for foreign investors, with Filipino language and English both used officially. Takamoto believes the abundant human resources will support the continued growth of business process outsourcing in areas such as IT services and call centres. There are 110,000 people presently employed in the call-centre industry. That number is expected to rise to 500,000 by 2010. There is also an abundance of engineers; the Philippines produces the largest annual number of graduates (50,000) from science and engineering universities out of all ASEAN countries.
The actual make up of the fund is 50% allocated to the VIP markets, split evenly, and the manager then has a free hand to invest in Hong Kong, Singapore and Malaysia. “So we can play China as well,” says Takamoto. As of mid 2008, the fund has 12% in Hong Kong, 8% in Singapore, 6% in Malaysia and a further 10% in Hong Kong H shares.
DIAM has five staff in the management team and 90 stocks in the VIP fund. They are mostly large cap stocks, which Takamoto says is dictated by liquidity as much as anything. Stock selection style is a mix of top down and bottom up. The sector composition follows a familiar pattern for emerging markets funds, with an emphasis on telecoms, consumer-related stocks, commodity plays and financials. Core holdings include Philippine Long Distance Telecom, China Mobile and Telecom Indonesia.
Takamoto says, “We also like the local consumer names since retail is booming in Asia. Of course the commodity price is a huge influence at this time. We are exposed to oil, coal, palm oil, zinc, thru the Indonesian stock Bumi Resource, which makes up 4% of the total portfolio. Indonesia is rich in underground resources such as natural gas and coal. It is first in the world in terms of export volumes of liquid natural gas and coal, and second in terms of production volume of tin.
Investors with a long term time horizon will benefit most from a fund of this type. Takomoto says, “We are taking a five to ten year view but even in the short term, there is huge scope. Market cap compared to GDP in Indonesia and the Philippines is 50%, in Vietnam it’s 20%, compare that to 10 timesin Hong Kong. The dividend yields of Indonesia and the Philippines show high trends in comparison with those for the region as a whole. Return on equity is appreciably higher as well. Because we have the long-only growth bias, we will do best when the markets are broadly rising. We can dial down the market exposure and raise cash to 10%. At the time of the interview, the cash level is 3%. Turnover in the fund is less than 30, which compared to many funds in Japan is very low.”
In its first six months, the fund benefited from a fair wind in the markets, returning 15%. However since the beginning of 2008 and the global market turmoil, the fund is down 25%. But Takamoto is confident this is just a short term correction and that the performance will turn around by the end of the year: “It’s a tough time as these countries work to keep inflation under control. It’s 25% in Vietnam (as of the end of May 2008)and 10% plus in Indonesia. The biggest contributor is food and energy. However, when we compare the situation with the 1990s, real interest rates are much lower now. That means a lot of money is hanging around and that is driving commodity prices. Once we see that inflation is topping out and interest rates remain low, the liquidity will return. We are already seeing money return to the markets.”
Valuations for Indonesia and the Philippines are also still attractive. Takamoto says, “If you look at the way prices got out of kilter in 1997 and 2001, the Philippines and Indonesian markets were trading at 40 to 50 times average earnings. Now it’s just 13 or 14 times, so we have better fundamentals now and the downside is limited.”
Each of these countries face their own risks domestically, mostly related to political instability. Takamoto observes, “We have seen food riots which raise the risk of a political clampdown. When that happens, foreign companies are hesitant to invest. So we hope for an extended period of political stability. The currencies have done OK because each country has foreign exchange reserves and a current account surplus. But if the political situation changes, this would obviously weaken the currencies.
Top 10 holdings of the DIAM VIP Fund
PHILIPPINE LONG DISTANCE TEL 3.87%
BUMI RESOURCES TBK PT 3.44%
CHINA MOBILE LTD 2.41%
TELEKOMUNIKASI TBK PT 2.30%
PT ASTRA INTERNATIONAL TBK 2.29%
VIETNAM DAIRY PRODUCT CO 2.25%
BANK OF PHILIPPINE ISLANDS 2.13%
CHINA CONSTRUCTION BANK 1.94%
GLOBE TELECOM INC 1.86%
HANG LUNG PROPERTIES LTD 1.81%
(As of the end of April 2008)
A lot of attention has already been focused on Vietnam. Indeed its stock market has risen 1000% since 2000. Despite the currently stretched valuations, DIAM considers there is still plenty of long term upside. Takamoto says, “All the conditions, such as a superior work supply (cost, quality), political and social stability, and a continually improving investment environment, are in order which makes this country the candidate with the most “post China” potential. Literacy rates are running at 95%, the people are hard-working and mild-mannered. Vietnam is where Japanese manufacturers think they can develop business in the future and is third after China and India, according to the Japan Bank for International Cooperation.”
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