Open funds - opportunities for Vietnam market

CA - Vietnam’s market needs to have diverse investment products that can meet different requirements on liquidity risk, the discount between the price of fund certificates and the net asset value (NAV) – the tools that have a high transparency and reflect the real value of invested assets. The open fund will be a perfect solution to address the above needs.

This was the outcome of a seminar on the open fund for the project on ʺDevelopment of Vietnam capital marketʺ ‐ A collaborative project conducted by between Luxembourg and State Securities Commission of Vietnam.

Vietnam ‐ potentials for open fund development

Cerulli, from a research firm specialising in assets management forecast that public funds will grow rapidly in Asia with an annual growth rate of 14 percent in the period from 2010 to 2014. The fund management industry in some developing economies in Asia based on the development of open funds, although this type is in slow development, it posts strong growth.

In Vietnam, the open fund market is still primary as investors are still keeping the habit of sending money from banks or hoarding gold. Public funds currently account for 2 percent of member funds and portfolio management (27 percent) and foreign funds (71 percent).

Alastair E Murray, director of Asia Pacific Fund Services Department (outside Hong Kong market), the Securities Services Division of HSBC said that Vietnam now has 5 new forms of closed public fund with a total net asset value (NAV) of about $185 million, representing approximately 0.44 percent of total market capitalisation value. In addition, there are 17 member closed funds with total NAV of about $395 million, accounting for 0.94 percent of total market capitalisation. Closed public fund certificates are being traded slightly below the NAV.

Meanwhile, the demand of the current market needs a channel to mobilise savings that can support the development of pension funds, reducing pressure on the state budget resources, are managed by professional businesses. The formation of a broad distribution channel, can meet the needs of investors efficiently with the highly transparent tools and reflect the real value of investment properties, has become an urgent demand now.

In comparison with actual needs, Alastair E Murray said that open funds would be a perfect solution to solve the above demand. Open funds would help promote investments systematically managed by professional investors, contributing to formation of pension funds regardless of the state budget. At the same time, these would create transparency of investment products, reflecting the real value of investment properties, allowing investors to benefit from market opportunities in a timely manner, thereby contributing to the strong attraction of foreign capital.

At the same point, Henk Ruitenberg, CEO of Vietnam Prudential Fund Management Company said that the establishment of the fund not only helps to open the State and government of Vietnam to manage cash flow more transparently and conveniently, but also help investors buy and sell investment properties easier because liquidity is higher. In addition, the development of open‐fund market may reduce pressure on the foreign exchange problem and relieve the psychological concerns of investors (discounting, liquidity).

Most experts said that GDP per capita growth will increase demand for asset management. Therefore, Vietnam with high GDP growth will be more promising for high growth potential of this market.

Challenges in operating open funds

Alastair E Murray said that despite the very prospective development of open funds, Vietnam needs to have clear rules on how to record transactions and transfer of ownership of investors, record identification information of investors, fees on management and operation of the funds, the commission charged, the trading time of fund certificates and the frequency for calculating NAV, the suspension of trading, adjustment of the value and risks of cash in transaction accounts and the like.

Sharing experience in developing the public fund market, Henk Ruitenberg said that household assets are critical and public funds are the main tool for the development of savings channel into investment. In addition, lawmakers should consider the knowledge issues for investors, risk management for property and ineffective foreign funds.

In particular, the investment risk to open funds should be more cautious, especially about liquidity risk.

For recommendations on the formation of open funds, a HSBC representative said that an appropriate legal basis should be set up for the formation and development of open funds. Accordingly, the legal basis will allow fund managers to focus on core operations by authorising agents to perform the support services, providing the flexibility for operators to leverage funds’ effective business models with the goal of lowering costs for investors. Also, the legal basis should highlight the implementation of supervision and control process effectively.

SSC still in the drafting process of open funds

Nguyen Thanh Long, deputy director of Fund Management ‐ SSC said that toward the legislature, the draft regulation on the open fund is still in good progress. But the problem is whether the market is ready, companies are ready or not. In the past year, the SSC held 3‐4 conferences for seeking opinions and comments and the SSC is in the process of finishing the regulation on the open fund.

Long also confirmed that, in order to limit liquidity risk for open funds in cases where investors en masse withdraw cash, fund management companies shall have the right to halt the re‐purchase when the rate exceeds 10 percent and management companies will be allowed to borrow external funds at a rate not exceeding 5 percent of net asset value within a maximum of 30 days to cover the necessary expenses.

SSC said that in the process of drafting guidelines for the open funds, this agency consulted opinions from various organisations, experts and people. Also, it must surely understand the situation of members, investors entering the market. It will take more time to promulgate this regulation.