Funds lose allure on weak liquidity

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Ho Chi Minh City stock market's closed-end funds have lost their appeal in recent months and experts have attributed this trend mainly to weak liquidity.

Vietnam Securities Investment Fund (VFMVF1 or VF1), the country's top equity fund by liquidity, has lately seen less than 100,000 of its shares changed hands per day on average.

This is a big fall for the fund that has a registered capital of VND1 trillion. In May 2010, around one million shares of VF1 changed hands per day.

As the majority of stock market players are day traders who only want to buy and sell stocks in a very short time, they are not keen on shares whose liquidity is low, experts say.

With investors having lost interest in share funds, their net asset values (NAV) have continued to outstrip their share prices and their discounts to NAV have been climbing.

Discount to NAV refers to a situation where shares of a closed-end stock fund are trading at a price lower than the fund's NAV per share.

When the fund is trading above its NAV, it is said to be trading at a premium. But most of the time, the funds trade at discounts.

The discount of closed-end funds is a good measure of the "fear-level" in the market, widening in times of trouble as investors run for the exit, and narrowing in bull markets when increased demand for funds' shares compresses the discount.

On February 3, when VF1's shares were traded at VND11,300 and its NAV per share stayed at VND21,723, its discount rocketed to 48 percent, the highest rate in the last seven years.

To keep discounts from growing too wide, some funds have bought back shares in the market.

For example, on December 3 last year, foreign-invested Prudential Vietnam bought back 15.85 million shares, or a 31.7-stake of its PRUBF1 fund. It was a crucial move in the absence of which the fund could have faced divestment or transfer to another fund manager.

In August, 2010, when PRUBF1 shares cost only VND4,200 each, many fund managers rushed to buy the shares in the hope that they could hold more than a 30 percent stake in the fund the threshold at which they are allowed to convene an extraordinary shareholders' meeting where they can request approval of a plan to transfer the fund to another fund manager or even close the fund.

While foreign fund managers are allowed to buy back shares as a discount control measure, local ones cannot.

Domestic fund managers have many times sought the State Securities Commission's approval to allow them to buy back shares to keep their funds' discounts from widening further, but the stock answer has been: "the commission is studying this issue."

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