Bridging The Gap

There’s been a lot said since Prudential Insurance Vietnam announced its intention to buy back nearly one-third of the fund certificates of the Prudential Balanced Fund.

It is generally understood that when an investment fund decides to buy back its own fund certificates from the stock market that it is aiming first and foremost to narrow the discount between the share price and the net asset value (NAV). It’s a normal part of trading activity and a regular occurrence among investment funds.
The situation, however, is a little bit different at Prudential Balanced Fund (PRUBF1), as it last month registered to buy 15.85 million fund certificates from its holding company - Prudential Insurance Vietnam. For insiders, especially market analysts, the move was more than about simply cutting the discount gap.

PRUBF1 was established in December 2006 with an initial fund size of VND500 billion ($25 million).
The fund is managed by Prudential Vietnam Fund Management Company, an affiliate of Prudential Insurance Vietnam. Until December, PRUBF1’s NAV stood at VND8,401 ($0.42) per fund certificate while its market price ranged from VND5,900 ($0.29) to VND6,200 ($0.31). This makes the price of the fund certificate 27.6 per cent lower than the NAV.

An analyst and investment consultant from Bao Viet Securities Company, who has observed the recent trading activities of PRUBF1 and who wished to remain anonymous, told VET that PRUBF1’s price has increased about 34 per cent from October to December this year. “If there’s a bright side for an investment fund when deciding to buy its own fund certificates, it’s that the amount of certificates on the market will be reduced,” he said. “And, in theory, the buy-back decision helps to push up the price of the fund certificates and gets a positive response from investors in their buying decisions.” Beside Prudential Insurance Vietnam, Asiavantage Global Limited, another major shareholder of PRUBF1, has also registered to buy 1 million fund certificates and to sell 3.8 million fund units to restructure its portfolio.

Since 2008 a number of investment funds in Vietnam have seen their fund certificates being traded at a price below their NAV. The average discount has still been fairly high recently and reflects the difficulties hedge funds have faced when investing in Vietnam. Four domestic funds: Prudential Balanced Fund, Vietnam Securities Investment Fund (VF1 and VF4), and Manulife Fund have also found themselves in a tight spot with a high discount gap.

A large gap between the NAV and the share price is not something that fund mangers or the holding company wish to see. According to Mr Jack Howell, CEO of Prudential Insurance Vietnam, the company sees PRUBF1 as an attractive investment and, in line with the company’s long term investment objectives and strong commitment to the Vietnam market, aims to increase its holdings. “Although it is not the prime reason, obviously the public offer at a higher price than the market price implies a narrowing of the discount,” he told VET. “Over a longer term basis, we would expect the discount to be narrower than its current level.”

So a big question that investors are asking right now is whether Prudential Insurance Vietnam has to sell off assets to fund the bid for the 15.85 million fund certificates. With 50 million fund certificates of PRUBF1 in circulation, Prudential Insurance Vietnam needs around VND98.3 billion ($4.9 million) to buy 15.85 million at the public offer price of VND6,200 ($0.31) per unit. The answer is still to come, as Mr Howell preferred not to discuss it.

Liquidation pressure

On the other hand, a dramatic widening of the discount makes investment funds more vulnerable against aggressive hedge funds interested in speculation. It wasn’t the main reason, but the high discount was nonetheless an important factor in Indochina Capital Vietnam Holding Limited (ICV) liquidating last year. Earlier this year, two other funds - Dragon Capital’s VEIL and VGF - also faced the danger of liquidation for the same reason. Such events make domestic funds more cautious.

According to Mr Nguyen Viet Duc, Deputy Director of Saigon Hanoi Fund Management, domestic investment funds are yet to be attacked by funds with speculation in mind, not because they are operating effectively but because they are better protected by regulations than foreign funds. There is talk, however, that Saigon Securities Inc (SSI) is targeting PRUBF1’s fund certificates with the aim of gaining a controlling vote.

SSI’s trading activities over the past two months have consolidated with the information that it is monitoring PRUBF1’s situation. In August it registered to buy 2.5 million fund certificates from PRUBF1, then two months later registered to buy and sell 1.25 million. SSI is now one of the major shareholders at PRUBF1, as the Ho Chi Minh City-based company holds nearly 4.2 million fund certificates, or 8.36 per cent. A representative from SSI cited company policy when declining to comment on the matter.

Such rumours may turn out to be accurate or completely off the mark. But Mr Howell told VET that, “A successful public offer implies greater stability as its completion will enable us to have stronger ownership within the fund.” With the acquisition of 15.85 million fund certificates, the company is now holding nearly 34 per cent of the total. Such moves, to some extent, send a warning to parties and investors looking to take over PRUBF1. Mr Duc, meanwhile, believes that domestic funds with a defensive attitude also face negative impacts as investors don’t want to contribute their money to those funds.

Source: Hai Bang -

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