Group9 investment fund and mutual fund

CONTENTS I OVERVIEW OF INVESTMENT FUNDS Basic knowledge of Investment funds 1.1 Key Definitions Investment funds vs Mutual funds  Investment fund: An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group Some characteristics of investment funds: • • Investors of investment funds purchase fund certificates as their contribution to the fund Investment fund is the overall concept, which includes many different types of funds, for example, mutual fund, pension fund, hedge fund, etc  Mutual fund: A mutual fund is a specific type of investment fund that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities, or even cash Some characteristics of mutual funds: • Investors purchase shares either from the fund itself, or from a broker Investors cannot trade the shares on a secondary market, such as the New York Stock Exchange or Nasdaq Stock Market The mutual fund shares purchased at fund’s approximate net asset value (NAV) per share plus any fees that the fund may charge at purchase, such as sales charges, also known as sales loads • Mutual fund shares can be redeemed Majority of mutual funds are open-ended funds Therefore, whenever investors want to sell their fund shares (or buy new shares), they sell them back to (buy from) the fund, or the corresponding broker, at their current NAV per share, subtracting (or adding) any fees the fund may charge, such as deferred sales loads or redemption fees • Mutual funds sell shares on a continuous basis, although some funds will stop selling when, for example, they reach a certain level of assets under management In our topic, we discuss not only mutual funds but about investment funds in Vietnam in general An investment fund provides a broader selection of investment opportunities, greater management expertise and lower investment fees than investors might be able to obtain on their own Types of investment funds include mutual funds, exchange traded funds, money market funds and hedge funds Fund certificates  Definition: Fund certificates are securities, authorizing the ownership of investors toward a part of a public investment fund  Comparison between Fund certificates and stocks  Common characteristics Fund certificates and stocks have two characteristics in common Firstly, both fund certificates and stocks are evidence authorizing the ownership and the profits of the investors based on their capital contribution Secondly, both are listed on the stock market to be traded among investors  However, besides these similarities, fund certificates and stocks differ from each other in three following points First and foremost, fund certificate is a mean to fund the establishment of the investment fund, while stock is a mean of raising capital for a business Moreover, for the investment funds, the fund management company is the party who controls and makes decisions The investors of the investment funds not have the voting and management rights On the other hand, stockholders have voting and management rights Last but not least, fund management company invests in portfolios of securities on behalf of fund investors Meanwhile, investors of stocks invest on their own Therefore, they can flexibly choose to invest on securities they want, instead of following the decisions of other party 1.2 Benefits of investment funds An investment funds provides many visible benefits for the investors, including:  Providing broader selection of investment opportunities: By aggregating the funds from numerous small   investors into a specific pool of investment capital, a investment fund enables individual investors to access to a wider range of securities than the investors themselves would have been able to access Better management and strict supervision: The investment funds are directly managed by a fund management company, who has well-educated experts on investment field Therefore, investors of these funds can have the benefit of expertise management, which potentially offers better returns and more adequate risk management At the same time, the fund is supervised by multiple parties, including Ministry of Finance, State Bank of Vietnam, State Securities Commission, custodian bank, etc., who ensures the transparency and protect the rights of the investors Benefit from economies of scale: By investing in investment funds, investors can eliminate the cost of administration, research, etc Also, funds invest in larger quantity compared to individual can, therefore, they also are charged less of transaction cost than individual investors 1.3 Investment fund operation Fig 1: Operation flow of investment fund In a investment fund, investors invest money by buying fund certificates, authorized by the Fund Management Company which owns the investment fund Then the Fund Management Company uses the pool of capital to buy and sell securities on the securities market The securities market, hence, brings profit back to the investment funds, which then are distributed to the investors 1.4 Fund management and supervision Fig 2: Management parts of Investment fund As shown in Figure 1.2, there are five main stakeholders involving in the Investment funds Investors are the stakeholder who invest their capital into the fund and receive profits from the fund, however, they have no voting and management power toward the fund An investment fund is owned by a fund management company Fund management company directly manages and operates the fund, sets the objectives, investment policy and strategies The direct management bodies supervising fund management company are Ministry of Finance, State Bank of Vietnam and State Securities Commission They oversee the entire operations and synergy between fund management company, investment fund and also custodian bank Custodian bank is the party who preserves and custodies assets of investment fund, as well as supervises the fund management company in order to protect the rights and interests of the investors To ensure transparency, audit firms conduct the objective evaluation of the fund's current situation and its operation History of investment fund development in Vietnam The appearance and development of investment funds in Vietnam can be divided into two stages: before 2000 and after 2000 Different characteristics of two stages prove the development of the market in Vietnam over the years from fund types, fund size, State’s regulations to operating efficiency… 2.1 Before 2000 Initial years of the 90s of the twentieth century marked the first wave of FPI- foreign portfolio investment- into Vietnam with the appearance of first foreign funds over the territory - - In this period, all of the invest funds were foreign ones with representative offices in Vietnam Funds’ capital total was about US 700 million after mobilization Almost foreign investment funds in this period were closed- end ones, listed in foreign stock exchanges with the limited operating time of 10 to 30 years Those funds penetrated Vietnam market by making investment via joint- venture contracts with domestic companies Later, after the Government’s permission for equitisation - the conversion of a state-owned enterprise in Vietnam into a public limited company or a corporation, some funds took part in holding shares of stock of newly equitized companies to gain profits However, funds’ operation before 2000 was inefficient for lack of explicit information for investment decision into Vietnam corporations, shortage of means for capital recovery and high investment risk… Difficulties in finding sources of financing operation, limited profit, inefficient operation together with the Asian financial crisis (1997- 1998) made most of investors and foreign funds withdraw from Vietnam Some outstanding investment funds during the period: - Vietnam Fund (VF): a closed end fund under the management of Vietnam Fund Management Ltd The first mobilization was in September, 1991 with total capital of US 51 million, listed on Irish stock exchange VF invested US 42 million into 11 projects and regained capital twice - Vietnam Frontier Fund (VFF): a closed- end fund managed by Finansa The fund was launched in October, 1994 and listed on Irish Stock Exchange with the total mobilized capital of US 59 million it invested US 30 million in projects and regained capital once - Beta Mekong Fund (BMF) and Beta Vietnam Fund (BVF): closed- end funds under management of Indochina Asset Management Ltd Funds were launched in October and November, 1994 and listed on Irish Stock Exchange The total capital size was US 80 million and invested about US 50 million into 17 projects - Lazard Vietnam Fund (LVF): another closed-end fund managed by Vietnam Vest Ltd It issued equity shares in November 1994, and it shares were quoted on The Stock Exchange Dublin in Ireland LVF was capitalized at US 55 million 2.2 After 2000 till now The appearance of Stock Exchanges in Ho Chi Minh City and Hanoi and then Stock market at the beginning of the new millennium marked the turning point in the development of investment funds’ operation and fund management companies in Vietnam This brought about great expectation from both foreign as well as domestic investors, and changes in investment strategies of fund managers gradually replaced old strategies from the previous period Unlike investment funds of the previous period targeting at ambitious projects of US to million, those of the after-2000 period focused on investment efficiency regardless of company and project size The second wave of foreign investment through funds started in 2002, when investors saw a huge business opportunity from large- scale equitisation process of SOEs, state- owned enterprises, in Vietnam From 2002 to 2005, the market saw little fluctuation, but some new funds from Mekong Capital, VinaCapital, IDG, VietFund and PXP Asset Management emerged The period of 2006- 2007 was recognized as the miracle booming time of Vietnam stock market Accordingly, domestically established investment funds and fund management companies in Vietnam grasped the precious opportunity to nourish About 20 new domestic investment funds were launched, total mobilized capital of over VND 13,500 billion, and 17 fund management companies were permitted by the SSC to start their operation in the market Of those new participants, joint venture between BIDV and Vietnam Partners LLC- BIVM and its fund, VIF, had maximum capital size of VND 1,600 billion Besides, a number of new firms with huge capital size were established in 2007: - FPT Fund Management Joint Stock Company (FPTCapital - largest chartered capital of VND 110 billion), SSI Asset Management Limited Company (SSIAM - chartered capital of VND 30 billion), Dong A Capital Company Limited (DongACapital - chartered capital of VND 30 billion) Foreign securities firms entered Vietnam: Nomura International (Hongkong), Blackhorse Asset Management Pte Ltd (Singapore) and Mirae Asset Maps Investment Management Co., Ltd (Korea) According to ownership, there were both foreign and domestic funds in the market An unofficial statistics showed that more than 400 funds had been operating, but only a few were domestic ones After the boom, the stock market in Vietnam was hurt by the global economic crisis 2007- 2009, which led to the slowdown of wave of opening new funds and ineffective running of existing investment ones Therefore, in 2011, Circular 183- 2011/TT-BTC - guiding establishment and management of open end (investment) funds - was released, which opened the opportunity for a more flexible type of fund (open - end ones) to appear and potentially deal with unpredictable market in Vietnam For the first decade of the 21 st century, closed- end funds dominated Vietnam market, so the Circular helps to promote the establishment of new domestic open- end funds, a bright trend for the future, and to diversify types of funds to attract more and more investors From 2013 to 2014, a series of open – end funds appeared in the market Besides, some of closed end funds tended to convert into open - end funds to deal with the uncertain future In 2014, the first domestic ETF – exchange traded fund - was established Some outstanding funds after 2000: Capital Fund types Investment sectors Vietnam Enterprise Investments US 190 mil Limited, VEIL Closed – end Banking and financial sector, real estate Vietnam Opportunity US 170 mil Fund, VOF Closed – end Financial services, real estate, consumer goods for domestic consumption, and healthcare Vietnam Securities Investment Fund,VND 300 bil VFMVF1 Closed – end Financial – consumption… ACB Growth ASIAGF II Fund, VND 240.08 bil Closed – end banking, material, domestic Financial-banking, material mining, infrastructureproperty CLASSIFICATION OF FUNDS Closed - end fund 1.1 Overview  Definition: Closed – end fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund New shares in a closed-end fund are not created by managers to meet demand from investors  Characteristics: Advantages Disadvantages Liquidity No requirement for high liquidity Diversification Wide choice of closed-end funds available in the market Each portfolio carries a different set of risks need concerning Price Purchase at a discount to NAV, which can boost returns if the discount narrows or the share price moves to a premium Share price in the secondary market can be volatile because of depending on market price, not NAV Fees Lower expenses Fixed no.of share & trading time Closed-end funds can remain fully invested and invest in long term securities Distribution Only done in 1st mobilization, or when raising the fund’s charter capital through brokers/FMC Closed – end funds usually appear before open – end funds for the advantages they brought to investors and fund managers In Vietnam, at the very first step, closed – end funds dominated the market for the first decade of the century    Closed- end funds issue a fixed number of shares (fund certificates) in the IPO, and those shares cannot be redeemed on demand of investors so the funds have a stable amount of capital for investing in long- term projects and securities The growth rate of NAV of investment funds in Vietnam during that period was so impressive Almost funds experienced NAV growth that exceeded the growth rate of VN- Index by tens of percentage For example, growth rate of the NAV of PRUBF1 was higher than VN- Index growth up to 125% while that of MAFPF1 exceeded VN – Index growth by 48% The Government did not issue any official legal documents to lay down clear regulations/ rules and to make guidance for fund management firms to establish other types of funds until the Circular 183/2011  Some listed closed - end funds in Vietnam: VMFVF1 ( Quỹ Đầu tư Chứng khoán Việt Nam) VMF ( CTCP quản lý quỹ VN) VMFVF4 (Quỹ đầu tư doanh nghiệp hàng đầu VN) VMFVFA (Quỹ đầu tư động VN) ASIAGF ( Quỹ đầu tư tang trưởng ACB) ACB Capital Management Company MAFPF1 ( Quỹ đầu tư tăng trưởng Manulife) Manulife Asset Management PRUBF1( Quỹ đầu tư cân Prudential) East Spring Investment      After Circular 183/ 2011 was released, there has been a trend in recent years that a series of new open – end funds have been established and listed on the stock exchange, gradually replacing the old type of fund Another trend is the conversion of old closed – end funds into open – end, which experienced both success and failure VMF has successfully transformed three closed – end funds under its management (VF1, VF4, VFA) into open – end ones in 2013 Meanwhile, ACB Capital Management Company failed in its plan for conversion of ASIAGF into an open – end fund for poor investment strategy and management Manulife Asset Management also failed in transforming MAFPF1 for disagreement from its investors As a result, the fund dissolved at the end of its operating time and send back money to its investors PRUBF1 dissolved as MAFPF1 did at the end of its limited operating life of years 1.2 Case of ACB Growth Fund  General information Investors have their own reasons to carefully decide which investment fund they will contribute money to, because some investment funds run operation inefficiently compared with general market ACB Growth Fund established and managed by ACB Capital Management Company Limited (ACBC) had the growth rate below Vietnam market Index about 14% In years from listed date 6/2012 to 30/9/2014, ACBGF just went up 4.7% while Vietnam Index increased 18.7% and HNXIndex increased 29.5% Because of inefficient operation, big investors withdrawn their capital from the fund leading to the dissolvation of ACBGF after years working although the operation time registered is years General information Name ACB Growth Fund Abbreviation ACBGF Transaction code ASIAGF Transaction place HOSE Listing date 29/03/2012 First trading day 26/6/2012 First trading day price 10,200 First listed volume 24,008,000 General information Charter Capital 240 billion VND Listed shares 24,008,000 Establishment license 29/GCN-UBCK (02/22/2011) Permission No 931/TB-SGDHCM dated 03/10/2014 Management bank ACB Capital Management Company Limited (ACBC) Audit company PricewaterhouseCoopers Ltd Việt Nam Type of fund Closed -end fund  Objectives:  Optimize profits  Minimize the risk to the fund's investments  Increasing sustainably the value of its assets over the medium to long term  Creating a stable annual income to investors  Targeted Industries:  Energy industry  Consumption service and goods  Communication technology  Finance-banking service  Material  Infrastructure and real estate  Medical care  Investment portfolio:  Listed Stock  Listed bond: Government Bond, Corporate bond, Local Bond  Monetary instruments including certificates of deposits at credit institutions, treasury bills and commercial paper with less than year maturity from date of issuance  Other assets in accordance with law Fig 3: Investment portfolio of ACBGF in 2012 in percentage Fig 4: Investment portfolio of ACBGF in 2012 in percentage 98.16% of capital was used to invest in term deposit in commercial banks including ACB, AB Bank, BIDV, Maritimebank, MHB and Vietcapital Bank Fig 5: Investment portfolio of ACBGF in 2012 in percentage Although in 2013, the growth of securities market was quite good, ACBGF was reserved to invest in high profit securities because of risk aversion attitude Therefore, ACBGF just invested 0.71% capital in listed stock with 0.46% in ACB and 0.25% in Eximbank  How does the fund invest in deposit in commercial banks? Mechanism: $ $ Capital as deposit Fund Commercial Certificate of Fund management Fund banks deposit Commercial banks After mobilizing capital from individual or corporation investors, ACBGF invested their capital to (CDs) certificate Company (ACB Vietcapital as a deposit account certificate especially big commercial banks like ACB, AB Bank, MHB, BIDV, MaritimeBank and There are many kinds of deposit account such as transaction deposit and non-transaction deposit but ACBGF invested Limited over 90% in term deposit less than year to gain interest The bank will use the term deposit to invest in other targeted Company) investment portfolio like short-term real estate, business loan, credit loan and securities like government and corporate Investment fund (ACBGF) Investors stock and bond By this way, ACBGF can raise their revenue and income for them and their fund investors safely and stably  Why does the ACBGF mostly invest in deposit in commercial banks? From the established date ACBGF in 2011, the investment fund doesn’t have any employees but only managed and supervised by ACB Capital Management Company Limited (ACBC) and Charter Capital Bank Besides, most of investors to ACBGF have the tendency to withdraw their capital in short term Therefore, ACBGF needs the prudent and safe investment projects to generate profit to customers and investors, by instead of riskily investing in securities, ACBGF chose to leave the capital in form of term deposit - Safety: almost banks are managed by the State Bank of Vietnam, so the Deposit that ACBGF invests in such big Commercial Banks like ACB, AB Bank, Maritime Bank, MHB and Viet Capital Bank is quite safe because of State bank of Vietnam Management When ACBGF invested the capital as deposit, they can make sure that they won’t lose that investment amount due to the unexpected economic recession or inflation scenario - Stability: with each deposit, the fund can receive the stable amount of money per period equivalent to the amount that they invested in - Transparency: the bank will make it clear to customers and investors about the terms, interest and policies  Sales Cost Gross Profit Operational result 2012 100% 4.7% 95.3% 2013 100% 7.7% 92.3% 2014 100% 11% 89% Annual report of ACBGF in 2014 Illusted from the table, the gross profit in 2014 decreased to 89% compared with the profit in 2012 because of increasing cost of mobilizing capital through the year influenced by market Index and fluctuated macroeconomic problems Source: Accumulated growth compared to the growth index (2004-2013) Fig 11: Accumulate NAV of VF1 compared with VN-Index During 2004 to 2013, The growth of NAVVF1 fluctuated but was almost higher than the growth of the VN-index, which means this fund operated quite efficiently However, during that period, VF1 still acted as a closed-fund, the transaction price of fund certificates was not similar to the price of NAV so investors couldn’t maximize their profit VF1 has changed from closed-end fund to open-end one to affirm its position in investment fund market in Viet Nam Year 2010 2011 2012 2014 2015 NAV VF1 (8.2) 38.9 17.1 13.6 Vn-Index (2.0) (27.5) 17.7 8.1 6.1 HNX-Index (32.1) (48.6) (2.8) 22.3 (3.6) (Source: Vietnam Securities Investment Fund annual report in 2015) When VF1 changed into open-end fund, during 2014-2015, the NAV still kept increasing sustainably ( 9% in 2014 and 13.6% in 2015), the price of fund certificate was similar to the NAV, investors were more profitable because the growth in NAV fully surpassed the change in VN-Index In 2015, VF1 recorded a net profit of VND 99.3 billion after deducting all expenses of the Fund during the year The interest from investment activities was VND 108.1 billion VND, accounting for approximately 90 % of gross profit Earnings per fund certificate reached VND 2,830.2as a result of impressive NAV growth of 13.6% Real Estate Investment Trust  Definition: A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock REITs provide investors with an extremely liquid stake in real estate They receive special tax considerations and typically offer high dividend yields REITs, an investment vehicle for real estate that is comparable to a mutual fund, allowing both small and large investors to acquire ownership in real estate ventures, own and in some cases operate commercial properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls  Characteristics REITs are required by law to maintain some forceful requirements: • • • • • Invest at least 75 percent of its total assets in real estate Derive at least 75 percent of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate Pay at least 90 percent of its taxable income in the form of shareholder dividends each year Be an entity that is taxable as a corporation Be managed by a board of directors or trustees Therefore, there are some disadvantages and advantages of REITs which will be shown through the table below: Advantages Disadvantages Dividends: Stock exchange-listed REITs have provided a stable income stream to investors High risk from reasons - REIT returns shows correlation to the returns of the broader stock market - Management operation Tax consideration for REITS will increase the profit for investors Lack of transparent rules and regulations for REITs (in Vietnam) Small investment size  Situation in Vietnam Now, there are some foreign REITs in Vietnam but they have just mobilized the “free” capital from the individuals and corporations from foreign countries as the list below Foreign REITs REITs Vietnam Resource Investments Vietnam Infrastructure Limited (VNI) VinaLand Vietnam Property Holding (VPH) Indochina Land Holdings JSM Indochina Ltd Fund management company Dragon Capital VinaCapital VinaCapital Saigon Asset Management Corporation Indochina Capital JSM Capital Indochina Common characteristics - Most of REITs in Vietnam are closed-end fund because the investment products are real estates requiring stable fund flow for a long period of time Up to now, closed-end REITs which no transactions are conducted before maturity are appropriate for investment requirements - Most of REITs in Vietnam are foreign investment fund mobilize capital almost from foreign countries - Main activities of REITs: Buy or sell, manage Real Estate products, invest in Real estate projects or real Estate companies  Why doesn’t Vietnam have own REITs? - According to Mr Nguyen Vawn Duc-the CEO of Dat Lanh Real Estate company, the two main source of capital for the Real estate investment come from customers and commercial banks With commercial banks freely lending corporations and customers to purchase mortgage in recent years, it brings the alarming consequences when the investors lose their liquidity capability Besides, the real estate market in Vietnam doesn’t develop as well as others countries in area According to Mr Don Lam-CEO of VinaCapital, Vietnam economy and Vietnam real estate market specifically has been dependent on direct foreign investment instead of the capital from domestic investors The investors are exploring the source of capital from foreign REIT such as Jen Capital, VinaCapital, Dragon Capital and other fund coming from Japan, Singapore and Hongkong However, the borrowers (individuals and corporations) have to pay a high interest cost (57%/year) and other strict rules from foreign REITs - Mentioning the establishment of REITs in Vietnam, Mr Lam –CEO of VinaCapital said that “in Vietnam, we lack of transparent rule and regulations for REITs establishment and management Furthermore, in Vietnam market, there are many other developed investment funds, so people haven’t pay attention to REITs  The first REIT in Vietnam However, in 7-8 years coming, direct investment fund poured into real estate will come from domestic investors (maybe firms and individuals) In 2016, there will be the first REIT established in Vietnam with 100% of capital mobilized from domestic investors to support the real estate products purchase Name: Techcom REIT Fund Management Company: Techcom Capital Supervisor bank: BIDV Anticipated Listed Date: 2016 Listed Transaction: HNX Fund type: Closed-end fund Exchange- traded fund (ETF) 4.1 Overview  What is Exchange-Traded Fund? An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund Unlike mutual funds, an ETF trades like a common stock on a stock exchange ETFs experience price changes throughout the day as they are bought and sold ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for investors Actually, although in general ETF is considered to be as same as open-end funds, it still poses some differences Therefore, it is necessary to describe carefully how ETF operates and trades in Vietnam security market  Trading mechanism In primary market Fig 12: Mechanism of trading ETF in primary market - Buying process: Investors set an order to buy ETF certificate at AP, and then give AP a portfolio or money AP will send the buying request to the fund management company with portfolio Lastly, fund management company will release ETF certificate to AP and investors - Selling process: Investors will set a selling request at AP with ETFs certificate Then AP require fund management company to buy the ETFs The company receives ETFs and send back the portfolios to AP and investors To perform exchange merchanism, fund management company has to public information (about the exchange day and all the information of exchanging conditions) In secondary market Fig 13: Mechanism of trading ETF in secondary market After AP receives ETF certificates, they can sell them on the exchanges when ETF is listed In contrast, Ap can buy ETF certificates on exchange with the aim of getting the price difference or exchanging the ETF with portfolio with ETF management company ETF certificatea are exchanged like normal stocks Because ETF can be bought and sold in both primary and secondary market, their market prices are equal to iNAV at anytime If there is any difference from this balance equation, it will create an arbitrage transaction By arbitrage transaction:  If ETF>iNAV , investors tend to: o o  o o Sell the fund certificate on secondary market at current price ETF Purchase securities portfolio on SM/ FMC with iNAV and exchange for ETF to get profit If ETF