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MINISTRY OF EDUCATION AND TRAINING SATE BANK OF VIET NAM BANKING UNIVERSITY HO CHI MINH CITY TRAN TUAN VINH VALUE INVESTING AND RETURN IN VIET NAM SUMMARY OF DOCTORAL THESIS IN ECONOMICS Major: Finace - Banking Code: 9.34.02.01 Scientific instructor: ASSOC PROF., PHD LE THI TUYET HOA Ho Chi Minh City - 12/2019 LIST OF PUBLICATIONS RELATED TO THE THESIS Le, H T T., Tran, V T., Nguyen, N T P., Ngo, N S., & Huynh, T L D (2018) The Influence of Peg and F_Score on Stock Return by Valued Investment Portfolios: Empirical Evidence from Vietnam Asian Economic and Financial Review, 8(3), 366 Le Thi Tuyet Hoa, Tran Tuan Vinh & Nguyen Pham Thi Nhan (2018) Effectiveness of application of value-investing methods on Vietnam's stock market Journal of Banking Technology SUMMARY The main content of the thesis is to study the impact of three factors: the value of the stock, the quality of the stock and the investment horizon of the stock on the equity value of the stock in value investing on Vietnam's stock market In particular, the thesis uses PEG coefficient as a value factor and F_Score score as a quality factor The thesis uses Athanassakos (2013) model to study the relationship of the impact of PEG and F_Score coefficients on return of value investing and GMM regression model to estimate parameters In addition, to study the relationship of term to the return of value investing, the thesis uses the research directions of Li, Liu, Bianchi & Su (2012) and Bennyhoff (2009) The research data includes 1,667 observations, summarized in the period from 5/2007 - 5/2017, are enterprises listed on the Ho Chi Minh Stock Exchange, collected from FiinPro financial software, website of listed businesses, website of Ho Chi Minh Stock Exchange and IMF The research results show that: firstly, the average of average return of the portfolio of value stocks on Vietnam's stock market is higher than the average of the market portfolio of 15.65% And the PEG coefficient is inversely proportional to the stock's return Secondly, when integrating F_Score score into value investing, the superiority of return of the stock portfolio compared to the market increased to 20.66% And the F_Score score is proportional to the stock's return Thirdly, the investment term is proportional to the return of the investment value This means that the longer the investment term, the higher the return on return of investment Key keywords: value investing, return, PEG, F_Score, investment horizon, GMM, Vietnam stock market CHAPTER 1: INTRODUCTION OF THE STUDY 1.1 The necessity of the subject 1.1.1 Practical context The theory of value investing was first mentioned in the Theory of Investment Value in 1938 by John B Williams Completed and popularized when Benjamin Graham published The Intelligent Investor in 1949 The theory of value investing helps investors identify stocks what can bring high return, by selecting stocks with good quality, good growth and intrinsic value higher than market value Today, the theory of value investing is considered to be one of the most effective methods for stock investors in the world, there are many successful investors in the world are using this theory, such as: Warren Buffett, Peter Lynch, Joel Greenblatt, Walter Schloss (Vanhaverbeke, 2014) Along with the development of the stock market, the application of value investing theory is also very popular in Vietnam According to the research of Le Thi Tuyet Hoa, Tran Tuan Vinh & Nguyen Pham Thi Nhan (2018) shows that value investing theory is the most applicable theory on Vietnam stock market, with the rate of this theory application for 77% of total investors surveyed However, in Vietnam, the return of applying value investing theory is not really outstanding compared to the application of other investment theories (Le Thi Tuyet Hoa, Tran Tuan Vinh & Nguyen Pham Thi Nhan, 2018 ) The question is why the effectiveness of the application of value investing theory of investors on Vietnam's stock market is limited? How to improve investment efficiency for value investors in Vietnam stock market? In order to answer these questions, it is necessary to study the factors that affect the stock return in value investing of investors in Vietnam stock market 1.1.2 Theoretical context If other investment theories show that the factors affecting the stock return come from the outside of the stock, the value investing theory provides the view that the factor influences the stock return come from inside of stocks This theory shows that stocks have intrinsic value and that this value is determined through valuation (William, 1938; Graham, 1949) Studies on the impact of intrinsic value factors on stock return of Basu (1977), Chan, Hamao, and Lakonishok (1991), Fama and French (1992 & 1998), Chen and Zhang (1998), Kang and Ding (2005), Chahine (2008), Athanassakos (2009) and Pham Huu Hong Thai & Nguyen Vu Hong Phuong (2015) all show that stocks with intrinsic value higher than market prices bring return higher than stocks has intrinsic value lower than market price The second factor affecting the stock return in value investing is the quality factor of the stock (such as revenue, profit, growth rate, debt ) According to Graham (1949), stocks with good quality will have high return Sharing the view with Graham (1949), Fisher (2003) also argued that the quality of a stock affects the stock return Studies of Piotroski (2000), Mohr (2012), Galdi et al (2013), Hyde (2014) and Vo Thi Quy & Bui Thanh Truc (2015), Lynch (1989), Greenblatt (2010), Novy- Marx (2013), Athanassakos (2013), and Fama (2015) also show that the quality factors affect the stock return Warren Buffett adds a third factor which is that investment horizon also affects the return of stocks in value investment (Nikki Rose, 2000); According, holding long term value stocks will result in the stock return higher than short term holdings From the practical and theoretical contexts, we can be seen that the study of the impact of three factors: the value of the stock, the quality of the stock and the investment horizon of the stock on the return of the stock in the value investing in Vietnam stock market is a very necessary issue From there, it is possible to make policy suggestions to help improve return in value investing on Vietnam's stock market 1.2 Research gaps From reviewing and discussing researches on the impact of the value investing theory on stock returns, th thesis found the following research gaps: • The first gap, when using P/E and BM as a valuation factor, the above studies ignore the importance of the growth factor for the valuation of stocks as mentioned in Graham (1949, 1973), Lynch (1989), Fisher (2003) and Buffett (Hangstrom, 2005) To solve the first gap, the thesis will use the PEG ratio as a value factor to study the impact of the stock value factor on the return of value investment • The second gap, the F_Score built in Piotroski's (2000) research, reflects well the quality of the stock; however, the model used to study the impact of F_Score on return of value investment is inappropriate; Meanwhile, the model of the impact of the quality factor of the stock on stock return in Athanassakos (2013) is very suitable but the Score was built by Athanassakos (2013) to represent the quality factor of the stock is not appropriate again; To solve the second gap, the thesis will use the F_Score score as a representative of the stock's quality factor to study the impact of a stock's quality factor on the return of value investment At the same time, using the economic model in the research of Athanassakos (2013) to study the impact of the value and quality factors of stocks on the return of value investment • The third gap, there is very little research on the impact of the investment horizon on the return of value investment Therefore, the study of the impact of the investment horizon on the return of value investment is considered a gap To solve the third gap, the thesis will study the effect of the investment horizon on the return of valuable investment with terms from to years 1.3 Objectives of the study 1.3.1 Overall objectives The overall objective of the thesis is to study the impact of three factors: the value of the stock, the quality of the stock and the investment horizon on the return of the stock in value investing on Vietnam's stock market 1.3.2 Detail objectives • Determining the impact of the stock value factor on the stock return in value investing on Vietnam's stock market • Determining the impact of the quality factor of stocks on the stock return in value investing on Vietnam's stock market • Determining the impact of the investment horizon on the stock return in value investing on Vietnam's stock market • Proposing solutions and recommendations for the State and investors to improve the quality of the return of value investing in Vietnam's stock market 1.4 Research question • How is the trend and the degree of impact of the value factor of stocks on the return of value investing in Vietnam's stock market? • What is the trend and the degree of impact of the quality factor of stocks on the return of value investing in Vietnam's stock market? • What is the trend of the impact of the investment horizon on the return of value investing in Vietnam's stock market? • What solutions and recommendations are needed for the State and investors to improve the return of value investing in Vietnam's stock market? 1.5 Object and scope of the study • Object of the study: the impact of factors on the stock return in value investing on Vietnam stock market •Research scope: - Scope of space: limited research on stocks listed on Ho Chi Minh Stock Exchange - Time range: The study was conducted with review data from 5/2007 - 5/2017 - Scope of content: research on value investment in stocks with the following content limits: (i) with respect to the quality factors of stocks, only quantitative criteria are used; (ii) For the stock valuation method, only the multipliers (or comparison) method does not use the discounted cash flow valuation method or asset valuation method 1.6 Contribution of the research topic • About practice - See the impact of the value factor, the quality factor of the stock and the investment horizon on the stock return in value investing in Vietnam - Disseminate PEG valuation method and F_Score model to investors in Vietnam - Providing for value investors in Vietnam with reasonable solutions and recommendations to improve the return through the good selection of valuation factors, quality factors of stocks and investment horizon - Making recommendations for the State to develop the application of value investing theory in Vietnam • About theory - Generalize the theoretical background on value investing theory, the factors affecting the return of value investing, and the researches on the value investing - Adding new research directions when studying the impact of factors on the stock returns in value investing by using PEG as a valuation factor, F_Score as representative for the stock quality factor and economic model of Athanassakos (2013) to determine the direction and measure the impact of these factors on stock return - Adding research on the impact of the investment horizon on the return of value stocks 1.7 Methods and research data 1.7.1 Research Methods In order to answer the research questions of the thesis, the PhD student made the following research hypotheses: First hypothesis: PEG coefficient is inversely proportional to the return of stocks in value investing in Vietnam stock market The second hypothesis: F_Score score is proportional to the stock return in value investing in Vietnam stock market And the third hypothesis: the investment horizon will be proportional to the return of the stock in value investment in Vietnam stock market To prove the 1st and 2nd hypothesis, the thesis uses economic model of Athanassakos (2013) The formula of the model is as follows: Rit – Rft = a + b(Rmt – Rft) + c(Rst – Rbt) + d(Rlt – Rht) + e(Rhft – Rlft)+ eit In which: Rft is the risk-free rate of return at time t; Rmt is the return of the market portfolio; Rst is the return of the list of stocks with small market capitalization at time t; Rbt is the return of the portfolio of stocks with large market capitalization at time t; Rlt is the return of the portfolio of stocks with PEG less than or equal to at time t; R ht is the return of the portfolio of stocks with PEG greater than at time t; Rlft is a return of a portfolio of stocks with a low F_ Score at time t; Rhft is a return of a portfolio of stocks with a high F_ Score at time t At the same time, the PhD student used the System-GMM method to estimate the coefficients of the model, after checking the table data parameter estimation methods: Pooled OLS, FEM and REM To prove the third hypothesis, the thesis uses the research direction of Li, Liu, Bianchi & Su (2012) to prove the following four specific hypotheses: Hypothesis 3.1: Average annual return of value and good quality stock portfolio is proportional to the investment horizon Hypothesis 3.2: The difference between return of good value stock portfolio and risk-free rate is proportional to the investment horizon Hypothesis 3.3: The difference between the return of good value stock portfolio and the return of market portfolio is proportional to the investment horizon And hypothesis 3.4: Sharpe ratio of good value stock portfolio is proportional to the investment horizon 1.7.2 Research data The research data includes 1,667 observations, synthesized in the period from 5/2007 - 5/2017, are businesses listed on the Ho Chi Minh Stock Exchange, collected from FiinPro financial software, website of listed businesses, website of Ho Chi Minh Stock Exchange and IMF 1.8 The new points of the thesis • The first new point is that the thesis uses the F_Score to select good quality stocks, and uses the PEG valuation to identify undervalued stocks (or value stocks) to research on the return of value investment This valuation is more prominent than the P/E or BM valuation that most researches on value investing use, because it integrates the growth rate of the business • The second new point is the thesis using Athanassakos model (2013) to study the impact of F_Score and PEG valuation on stock return, while most previous studies all use the research model of Piotroski (2000) • The third new point is that the thesis studies the impact of the investment horizon on the return of value stocks; Meanwhile, most of the studies on the impact of the term of investment on the efficiency of investment are studied on the overall stock of the entire market • The fourth new point is that the thesis uses four criteria at the same time to study the impact of the investment horizon on the return of value stocks, including: (i) return of value stocks, (ii) outperform return of the portfolio of value stocks against risk-free rate, (iii) outperform return of the portfolio of value stocks compared to the market average return, and (iv) Sharpe ratio of the portfolio of value stocks • The fifth new point is that the thesis uses system-GMM method to estimate the coefficients in the regression model Meanwhile, most other researches use the Pooled OLS method • The sixth new point is that the thesis offers solutions and recommendations to help value investors to improve their return on equity in the Vietnam stock market 1.9 The structure of the thesis The thesis is structured with chapters: Chapter 1: Introduction of study Chapter 2: Theoretical basis of the factors affecting the return of value investing Chapter 3: Research methodology Chapter 4: Research results and analysis Chapter 5: Conclusions and recommendations CHAPTER 2: THEORETICAL BASIS OF THE FACTORS AFFECTING THE RETURN OF VALUE INVESTING 2.1 The theories of investment According to Burton, G Malkiel (2007), investment is a method of buying assets to make a profit in the form of reasonably predictable income (such as dividends, coupon or rental income) and / or investment value will increase after a long time Therefore, one of the important research topics of modern finance is the development of investment theories to help investors identify high stock return by studying the factors impact on the stock's return Common investment theories such as:        Castle-in-the-Air Theory Value Investing Modern Portfolio Theory – MPT Capital Asset Pricing Model_ CAPM Arbitrage Pricing Theory – APT Efficient Market Hypothesis Behavioral Finance Theory 2.2 Value Investing 2.2.1 Outline the development of value investing In 1938, The theory of Investment Value was first presented in the work of The Theory of Investment Value by John B Williams William (1938) proposed a formula to determine the intrinsic value of a stock based on dividend income and the concept of discount In 1949, Value Investing was perfected and became popular when Benjamin Graham published The Intelligent Investor Unlike Williams (1938) who only provided the method of determining intrinsic value, Graham (1949) proposed a method (later called the Value Investing theory) to help investors is possible to identify stocks which are likely to bring about high returns by selecting stocks with good quality and growth, determining the intrinsic value of these stocks, and then buying stocks which have intrinsic value higher than market value (called stocks underpriced by market _ UnderValue) The content of the Graham theory (1949,1973) revolves around two basic assumptions that (i) each stock has an intrinsic value that can be determined by the valuation method (ii) stock price will oscillate around and be affected by intrinsic value Therefore, return of stocks will be influenced by two main groups of factors, namely the value and quality factors of stocks According to Graham (1973), the criteria for selecting good quality stocks are: (i) Company size (ii) Financial status of the company (iii) The stability of company profits (iv) History of dividend payment of the company (v) Growth potential of the company At the same time, Graham (1973) used the comparative method (also called the multiplier method) to determine the intrinsic value of a stock, namely the P/E ratio (market price on EPS) and P/B (market price on book value) Graham's (1973) theory has two major limitations: - Firstly, the criteria presented by Graham (1973) lack the criteria to evaluate the profitability of the company In addition, the criteria for selecting quality stocks by Graham (1973) are still disjointed and unconnected to make a reasonable assessment of the quality of stocks - Secondly, when determining the intrinsic value of the stock, Graham (1973) uses P/E and P/B valuation, which shows that Graham did not care about the impact of growth on intrinsic value of stock In 2003, Fisher (2003) added qualitative criteria when determining quality stocks, highlighting the effects of growth when determining the intrinsic value of stocks and proposing equity investments with long tern for high return However, Fisher's theory (2003) also has some limitations such as: (i) Focusing on qualitative criteria, it will cause many difficulties for investors when applying to assess the company; (ii) This theory has little focus on financial indicators; (iii) It is not clear about the relationship of the P/E ratio and the growth potential of the company to see clearly when the stock is undervalued According to Hagstrom (2005), Warren Buffett developed the Value Investing theory by combining Graham's quantitative criteria (1949) and Fisher's qualitative (2003) to select quality stocks and use the discount cash flow model (DCF) of Williams (1938) to valuate stock; at the same time, adding investment horizon factors However, Buffett's theory has two limitations: first, the criteria for selecting quality stocks proposed by Buffett are still disjointed so that they can not properly assess the quality of stocks In this respect, the F_Score system to select quality stocks of Piotroski (2000) performed better Second, Buffett's intrinsic value that based DCF method is quite complicated for application investors and difficult to research In this respect, the PEG method of Lynch (1989) is more appropriate 2.2.2 Content of value investing theory 2.2.2.1 Identify undervalued stocks According to Damodaran (2012), there are currently three methods of determining the intrinsic value of common stocks that have been used: discounted cash flow; asset valuation; and comparison valuation (multipliers) The thesis uses the method of comparison with PEG ratio as a value factor to determine the value of stocks Determine the PEG ratio: PEG = P ⁄E g x 100 In which, g is the estimated growth rate Indicators for measuring growth rate Graham (1973) used EPS to measure growth According to Hangstrom (2005), Buffett uses the free cash flow of equity (FCFE) to calculate growth and this growth rate must be stable for many years in the past Lynch (1998) uses profits to assess business growth Fisher (2003) places the interest of a growth company in revenue However, using the company's after-tax profit or EPS to calculate growth is more appropriate Because for investors, profit after tax or EPS is the most concerned target, because it accurately 21 Step 2: Calculate the term free- risk interest rate (RfKH) and the average risk-free rate in each term 𝐸(𝑅𝑓𝐾𝐻(𝑛) ) Step 3: Calculate the excess between return of the portfolio against the risk-free rate at each investment term This excess is calculated by taking the average term return of the value stocks portfolio in periods minus the average risk-free rate in each respective period Step 4: Based on the calculated excess level, the correlation of this level and the investment horizon will be considered to find the results for the third hypothesis PhD student expects the excess of return compared to risk-free rates will be proportional to the investment horizon Testing hypotheses 3.3 Step 1: Calculate the term return and the average term return of the value stocks portfolio are implemented as formula (6) and formula (7) Step 2: Calculating the term market return (RmKH) and the average market return at each term 𝐸(𝑅𝑚𝐾𝐻(𝑛) ) Step 3: Calculate the excess return between the return of the portfolio of value stocks compared to the market return of each investment term Step 4: Based on the calculated excess, the correlation of this excess and investment term will be considered to find the answer to the fourth hypothesis The thesis expects that this excess will be proportional to the investment horizon Testing hypothesis 3.4 Step 1: Calculate the risk of the portfolio of value stocks at each investment period Step 2: Calculate the Sharpe ratio at each investment period Step 3: Based on the calculation results above, consider the correlation of the Sharpe ratio and the investment horizon to find the results for the fifth hypothesis PhD student expects the Sharpe ratio to be proportional to the investment horizon 3.3 Research Data The research data includes 1,667 observations, synthesized in the period from 5/2007 5/2017, are businesses listed on the Ho Chi Minh Stock Exchange, collected from FiinPro financial software, website of listed businesses, website of Ho Chi Minh Stock Exchange and IMF 22 CHAPTER 4: RESULTS RESEARCH AND ANALYSIS 4.1 Impact of value factors and quality factors on returns of stocks in value investing on Vietnam stock market 4.1.1 Statistical results the data The data are all around the average value and are suitable for performing regression results in the methods which PhD student will use Table 4.1: Statistics describing the variables in the regression model Variable Obs Mean Std Dev Min Max Skewness Kurtosis RMRF 1667 -0.0783 0.2738 -0.7060 0.3826 -0.3316 3.1938 RIRF 1667 0.1307 0.6254 -0.9368 7.3384 3.1827 26.0126 PPEG 1667 0.0150 0.1046 -0.1467 0.1947 -0.0322 2.24237 PMARKETCAP 1667 0.1031 0.1631 -0.2196 0.5995 1.1564 5.8153 PFSCORE 1667 0.0038 0.0804 -0.2049 0.0938 -1.1419 3.4566 Source: Statistical results from Stata software 4.1.2 Result of testing the return of stock portfolios in value investing on Vietnam stock market 4.1.2.1 Return of stock portfolio in value investing selected by PEG value factor on Vietnam stock market The average return of the stock portfolio is 15.42% higher than the average of the market portfolio (-0.23%) is 15.65% Table 4.2: Comparison of return of value stocks portfolio and market return Number of Average return of Market Year Excess stocks value stocks portfolio return 2008 33 -30.59% -44.28% 13.69% 2009 18 92.19% -35.43% 127.61% 2010 64 -36.10% 63.13% -99.23% 2011 61 11.99% -11.38% 23.37% 2012 59 10.91% -2.91% 13.81% 2013 54 44.58% 0.12% 44.46% 2014 80 29.89% 19.41% 10.47% 2015 117 25.90% -3.50% 29.40% 2016 105 14.94% 12.74% 2.20% Average 15.42% -0.23% 15.65% Source: PhD student calculations T_test test shows that this statistical result is very significant with p-value of 0.0006 (see Table 4.3) 23 Table 4.3: T_test of return of value stocks portfolio value (with