Highlight Weighing icapital.biz’s fund fees and asset worth

Business & Markets 2013
Written by Cindy Yeap of theedgemalaysia.com
Wednesday, 11 December 2013 16:00
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CITY OF LONDON INVESTMENT MANAGEMENT (CLIM), which last year
stayed on the sidelines even as activist investor Andrew Pegge challenged the
managers of icapital.biz Bhd, has quietly upped its stake in Malaysia’s only
listed closed-end fund. At the time of writing, CLIM held 9.24% of icapital.biz, up
from 6.6% a year ago, raising questions as to whether it too would eventually
demand that icapital.biz’s assets be liquidated and the cash returned to
shareholders.
Pegge’s hedge fund Laxey Partners Ltd had made similar demands of private
equity firm 3i Group plc in March last year, just months before it sought board
representation on icapital.biz in November. Laxey wanted 3i’s shareholders to
vote that the firm be banned from making new investments and be forced to
sell its assets and hand back all proceeds to its investors, arguing that the
latter’s stock was trading at a 20% to 40% discount to the worth of its assets
back then. Laxey, which is now reportedly taking on the board of Rangers
International Football Club plc, was missing from icapital.biz’s recent annual shareholders’ meeting.
icapital.biz’s shares were trading at a 22% discount to its net asset value (NAV) of RM3.01 at their RM2.35 close last Thursday.
When contacted, CLIM kept mum about whether it was in contact with Laxey but described icapital.biz as “a closed-end fund that provides
[it] with the Malaysian exposure it requires at a significant discount to NAV”.
“As with most shareholders, we would like to see the price better reflect the NAV by seeing a contraction of the wide discount,” Oliver
Marschner, a Singapore-based fund manager for CLIM, tells The Edge. To a question on whether any action is being taken to derive more
value from its investment in icapital.biz, Marschner would only say that CLIM is “a global emerging markets fund manager that invests
predominantly in closed-end funds”, considers itself “a passive long-term investor” and has “no intention” of seeking board representation
in icapital.biz.
Tan Teng Boo, who founded icapital.biz’s fund manager Capital Dynamics Asset Management Sdn Bhd (CDAM) and investment adviser
Capital Dynamics Sdn Bhd, says no recent demands have been made by dissident or activist investors like Laxey since the debacle last
year.
Tan, who was once compared to billionaire investor Warren Buffett as a fund manager, told icapital.biz shareholders in October that they
will not be getting any dividends for FY2014 ending May 31 — just two months after paying the fund’s first and only dividend since its
listing in October 2005.
Tan said the special dividend made use of its Section 108 tax credits, which expire at the end of this year, and reportedly told shareholders
who want dividends to put their money directly into some of the stocks in icapital.biz’s portfolio, like Boustead Holdings Bhd, which was
giving 6% yield at the time.
To be fair, icapital.biz’s shareholders’ funds had grown from RM140 million at its IPO to RM418.9 million in FY2013. Still, are all the
shareholders happy with icapital.biz reporting profits on paper but not being generous with dividends?
In considering whether to take Tan’s advice to put their money elsewhere for dividends, it is worth noting that icapital.biz’s special dividend
of 9.5 sen a share — which works out to a net dividend of 7.13 sen per share or about RM9.98 million — is about 30.5% of the RM32.72
million it has paid in fund management and investment advisory fee from its IPO to May this year.
The fee is also about 11.7% of the growth in NAV of RM278.9 million since listing and 18% the profits generated over the past eight years.
It is also worth noting that icapital.biz had over RM209 million cash as at Aug 31, making up just over half of its total assets, compared with
the value of its investments, which stood at RM199.6 million. The over 50% cash holding was
at its highest since its IPO and is up from 34.34% as at end-2012, according to disclosures in
its 2013 annual report.
In notes accompanying icapital.biz’s latest quarterly results ended Aug 30, its fund manager
says “finding attractive stocks remains a challenge” in the current uncertain environment to
explain the high cash holdings. It also cites Buffett’s virtues of patience, saying: “We don’t get
paid for activity, just for being right. As to how long we will wait, we’ll wait indefinitely.”
All else being equal, Tan may do just that. “From its listing in October 2005 until now, the focus
has been on long-term capital appreciation of its NAV. For the future, it’s really the call of the
shareholders of icapital.biz. It is their company and it is up to the majority of shareholders
whether to change or maintain its long-held focus. However, so far, it appears that the majority
of shareholders want the focus to remain,” Tan tells The Edge.
Capital Dynamics will still get paid because its fee is based on a fixed percentage of
icapital.biz’s NAV, a structure that Tan says ensures that the fund manager is incentivised to
sustain improvements in NAV and, in turn, the achievement of its long-term goal.
“As a value investing-based fund manager, we look for long-term bargains … Although we target a compound 15% to 20% of NAV, how
the [share] price performs is another matter. Capital Dynamics does not get paid for activity [or] income from buying and selling frequently,”
Tan says.
When asked if anything is being done to narrow its stock price discount to NAV, Tan replies: “Maybe, investor sentiment is still weak,
maybe investors are too cautious, maybe investors haven’t discovered it yet. Value investors look for bargains. When a stock or stock
market is undervalued, take advantage of such opportunities. [They] won’t be there forever. “
Without a steady dividend promise, it would seem that shareholders can only sell their icapital.biz shares to realise the profits they see on
paper. As icapital.biz’s shares have been trading at a discount to NAV, this means that shareholders would not receive maximum returns.
Company disclosures show icapital.biz has largely been trading at about a 20% discount to NAV in at least the past three years (see
chart).
If selling is the only way to realise returns, can icapital.biz still be viewed as a long-term investment? And how long is considered long
term?
“As long as possible,” Tan replies. “When one finds a well-managed fund or stock that is compounding at 15% to 20% per annum, you
would want to hold as long as possible, right?”
In any case, Tan is right that change will only happen if enough shareholders want it. Not all might be happy to hear that the amount of
dividends they collectively received was only 27.5% of the RM36.3 million of icapital.biz’s total operating expenses to date, of which
RM32.7 million went to Capital Dynamics in the form of fund management and investment advisory fee.
To be sure, the fee structure of Capital Dynamics is transparent — just like any other managed funds, such as real estate investment
trusts
(REITs). Thanks to growing shareholder activism in Asia, questions are already being asked as to whether changes should be made to fee
structures for REIT managers — among which is whether in calculating fees paid to managers, NAV should include cash holdings, which
currently constitute 50% of icapital.biz’s books.