News from the frontier

Today I want to talk about the performance of the 2 portfolios I’m looking after. For details please click Here

Let’s start off with the bad news. Viet Moat Portfolio (VMP) recorded a minor loss of -0.1% vs a gain of VNINDEX of +10% from Dec 16 to March 17. Such underperformance is due to 2 key reasons:

1/ VMP doesn’t hold any real-estate related stocks and VNINDEX has partly gone up in the past 3 months thanks to the like of Coteccons, Novaland, Khang Dien, etc. Companies in the real estate sector are attractive for growth investors but are less attractive for moat-hunting investors like myself. The reason is that one of the sustainable competitive advantages that real estate companies such as homebuilders have is the ability to secure a good amount of land at a cheap price – this advantage however does not exist in a sustainable manner in Vietnam. This advantage can be achieved via relationships with the government, or maybe some sort of oligopolistic land auction market place (such of that seen in Hong Kong). A glance at land auction in Vietnam shows a good amount of interest exists from foreign companies and many small homebuilders. Thus securing cheap land seems to be a perfect competition rather than a monopolistic/oglipolistic market. However it must be noted that companies with financial strength would still stand at an advantage, yet it is the sustainability of this advantage (one that could endure for the next 10-20 years) that matters the most to VMP.

2/ VMP holds several illiquid and UPCOM-traded stocks. Movements in illiquid stocks are minimal on a short-term basis. More often than not the price of these stocks do not reflect the true value of the companies, even after upbeat earnings released before which the market clearly has not priced in. Movement of UPCOM-traded stocks won’t be recorded in VNINDEX for obvious reason. VNINDEX only includes stocks trading on the Ho Chi Minh Stock Exchange. Specifically VMP holds illiquid and UPCOM stocks as the followings: Safoco, Sa Giang, EID, SED, Vinacafe, Masan Consumer Corp, etc. Some of these play a big role in the VMP portfolio and their stock movements would therefore affect the performance of the portfolio in great magnitude. Such divergence between VMP and VNINDEX that is due to illiquid and UPCOM-traded nature of these stocks would be likely to persist in the near future.

Moving forward I don’t expect anything to change. VMP would still pursue the same quality-investing philosophy and the positions we have already held won’t change given that 2016 earnings still support very firmly the investment cases for each of the stocks. (click Here for details of 2016 earnings).

In addition the following companies are added to my watchlist as potential investments. These would be likely to be bought if an attractive price is available for purchase:

Bibica

Airport Corporation of Vietnam

Phu Nhuan Jewellery

PetroVietnam Low-pressure gas distribution

So that’s the bad news. Now move on to good news:

Update on the World Moat Portfolio (WMP):

Companies in WMP performed well in the past 3 months. Visa (+13%), Pepsi (+7%), Colgate (+11%), Wells Fargo (+0.5%) vs S&P Total Return Index (+4%). Wells Fargo didn’t move much in the past 3 months however since purchase of early October, the stock has delivered +20% vs S&P Total Return of 10%.

I’m happy to say that a new stock was added very recently in March. Starbucks is the new face to WMP – an amazing quality/growth coffee chain that has captured the coffee market worldwide. Personally I very admire Howard Schultz as a CEO and an investor and what he has built Starbucks to become what it is today. It is unfortunate to see him resign from the CEO post to focus on new growth avenues for Starbucks but the current management however looks very in good shape. I sincerely hope that the company would remain my most favourite coffee shop and that their new endeavours such as the Starbucks Reserve Roastery and Tasting Room would become a great success in the years to come.

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