Dragon shareholders vote against plan to shut funds

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Shareholders in two funds valued at US$636 million run by Dragon Capital Group Ltd., Vietnam's second- largest investment firm, on Monday voted down with a large majority a proposal to close them.

At the Vietnam Enterprise Investments Ltd. (VEIL) fund's annual general meeting (AGM), 83.2 percent of shareholders and proxy voters said the fund should remain open, according to an announcement made by the company to the London stock exchange Monday.

At the AGM of the other fund belonging to the group the Vietnam Growth Fund Ltd. (VGF), an even greater majority of 89.2 percent opposed a resolution to close the fund, the announcement said.

VR Capital Group Ltd., a Moscow-based hedge fund, had asked for the funds to be liquidated because of under-performance. VEIL recorded a 14 percent fall in returns last year while that of VGF declined 4.9 percent, according to data compiled by Bloomberg.

"The results reflect a clear sentiment that now is not the time to be exiting Vietnam, given strong market fundamentals combined with low equity valuations," Dominic Scriven, Ho Chi Minh City-based chief executive officer of Dragon Capital, said in a statement.

The quality of macro-economic management has been improving, and the economy is expected to expand by 6.5 percent this year, the statement said.

VGF chairman Marc Faber said he was pleased with the confidence shareholders expressed "in the prospects for both Vietnam and the fund by voting overwhelmingly to continue.

"It's clear that if there isn't absolute transparency in the underlying holdings in a portfolio, then shareholders feel less comfortable with it," Scriven said in an interview with Bloomberg. "We've spent the last year exiting the private-equity holdings that we had."

VEIL's low returns were partly because it is a closed-end fund, which means new shares aren't usually issued once it is set up, and partly due to Dragon Capital's investment in a mining venture, VR Capital president Richard Deitz said before the vote was taken.

Fund regulations

"I believe that the majority of shareholders (including many who did not support the winding up) would like to see the funds open-ended," Deitz said by e-mail after the meetings. Without converting the funds to an open-ended structure, Dragon Capital "will not be able to raise any fresh capital to grow their business," he said.

The State Securities Commission of Vietnam, the market regulator, is working on rules that may allow for open-ended funds, which typically allow new shares to be created and for redemptions to take place.

Dragon Capital is constitutionally required to hold a vote on closing the funds, and 75 percent of participants would have had to have supported the resolution for it to pass, Scriven said. "We had the biggest turnout that we've ever had (at such a meeting)", he said.

The results have eased pressure on the market, which has been depressed since the proposal to close the funds was announced, said stock investor Nguyen Thi Ai Van.

Blue-chip stocks

Incorporated in the Cayman Islands and listed on the Irish Stock Exchange, VEIL, launched in 1995, is now the largest dedicated offshore listed Vietnam fund to invest in publicly or privately issued securities. VGF, introduced in 2004, has its investment mandate in listed and listable securities.

The $409 million strong VEIL's biggest holding, as of May 27, was in Asia Commercial Bank, Vietnam's third-largest listed bank. On the same date, the VGF's largest investment was in Vietnam Dairy Products Joint-Stock Co., the nation's second largest company. The fund is valued at $227 million, according to data compiled by Bloomberg.

Vietnam-focused funds need to build a track record and report good returns before they can attract investors, said Kelvin Chan, Singapore-based senior vice president of Partners Group, which invests in private-equity and hedge funds.

"There are a couple of cases of reported investments that made good returns, but on the whole there are not a lot," Chan said. "Compared with other opportunities in more established markets in Asia like Korea and Australia, or even in Southeast Asia, investors don't need to go to new frontier markets to take those type of risks."

Dragon Capital in March 2007 paid an initial $225 million for a stake in Tiberon Minerals Ltd., a tungsten mining venture in northern Vietnam. The Ho Chi Minh City-based investment firm sold that holding in April to Masan Group Corp. for about $130 million.

"The key to our outlook on Vietnam has always been that the most predictable earnings exist in sectors related to the domestic economy, with businesses that we can understand, and with management that we can relate to," Scriven said. "The question going forward is how we can have not just blue-chips in the portfolios, but how to find companies that are going to be blue-chips in the future."

Other investment firms have wound up funds in Vietnam in recent years. Indochina Capital Advisors Ltd. last year decided to liquidate a London-listed Vietnam equity fund that had lost 50 percent of its value. In November, San Francisco-based hedge fund company Passport Capital LLC demanded the return of uninvested cash from a JSM Indochina fund that bought Vietnamese and Cambodian property.

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