VR Capital asks Dragon to close funds as returns lag

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Dragon Capital Group Ltd., Vietnam's second-biggest investment firm, has been asked by a shareholder to close two funds valued at US$654 million because of "very poor performance."

VR Capital Group Ltd., a Moscow-based hedge fund, on June 17 wrote to shareholders in Dragon Capital's Vietnam Enterprise Investments Ltd. calling for the fund to be liquidated at its annual general meeting next week. The fund is closed-end, which means that new shares are rarely issued after the fund is established and investors are locked in until it closes.

The State Securities Commission of Vietnam, the market regulator, is working on regulations to include instructions on establishing and managing open-ended funds, which usually allow for the creation of new shares or redemptions.

"They started these funds 15 years ago, when there wasn't any equity market in Vietnam and they had to be a closed-end structure because there was no liquidity," said Richard Deitz, president of VR Capital. "Vietnam now is more or less a normal market with a reasonable amount of liquidity and there is no reason really why investors should be in a closed-end fund."

There are currently 246 companies listed on the Ho Chi Minh Stock Exchange, with a market value of VND465 trillion ($24 billion). At the end of 2000, when Vietnam opened its stock exchange, only five companies were listed with a capitalization of VND1.05 trillion.


VR Capital also wrote to shareholders in Dragon Capital's Vietnam Growth Fund Ltd. on April 6, asking for that fund to be liquidated.

A vote on winding up Vietnam Enterprise Investments, which is provided by the constitution, will be held at the fund's annual meeting in Ho Chi Minh City on July 12, Beat Schuerch, a director of Dragon Capital, said Monday by e-mail. At least three-quarters of votes cast would have to be in favor of closing the fund, Schuerch said.

The board of Vietnam Enterprise Investments opposes closing the fund, as "now is not the time to exit investments in Vietnam," according to a letter sent to shareholders on June 22.

"It's entirely up to shareholders what they want to do," said Dominic Scriven, HCMC-based chief executive officer of Dragon Capital, "People on balance probably don't want to take their money off the table, given that Vietnam has a fairly strong outlook" for economic growth.

The government is targeting economic growth of as much as 8 percent annually through 2020. Gross domestic product rose 6.2 percent in the first half from the same period the year before.

Indochina fund

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.

The VN-Index has declined more than 57 percent from a record high of 1,170.67 on March 12, 2007.

Detailed regulations on open-ended funds currently do not exist, said Samantha Campbell, HCMC-based head of Vietnam banking and finance at law firm Gide Loyrette Nouel. The SSC's draft circular "should permit greater flexibility in the investment market," she said.

Vietnam Enterprise Investments, which is listed on the Irish Stock Exchange, has fallen about 14.5 percent in the past year, according to data compiled by Bloomberg. In US dollar terms, the VN-Index has gained 2.8 percent in that period. The fund's largest holding as of May 27 was Asia Commercial Bank, the third-biggest listed bank in Vietnam.

The biggest investment of the Vietnam Growth Fund, as of May 27, is Vietnam Dairy Products Joint-Stock Co., the country's second-most valuable company. The fund has declined 3.3 percent in the past year.

Tiberon investment

Some investors in the funds have made losses, Dietz said. "This is due to both the funds' very poor performance as well as the substantial discounts" to net asset value at which they trade. Net asset value refers to the portfolio value of assets in the fund, minus liabilities, divided by the number of outstanding shares.

Losses at the funds have been partly due to the closed-end structure, and partly because of Dragon Capital's investment in Tiberon Minerals Ltd., VR Capital's Dietz said.

In its April 6 letter to shareholders, VR Capital said that Dragon Capital should sell a stake in Tiberon, a tungsten mining venture in northern Vietnam, because "the market attributes no value to this holding," according to the text of the letter.

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