Saturday, November 3, 2012

Lesson on iCap: How do you attack a Closed-End Fund

Something is definitely brewing for this usually inactive closed end fund, Firstly, as in my previous article, this fund has been trading way below its Net Asset Value (NAV) for a while now. While the fund has continually been trading at steep discount, sometimes as high as 29%, Laxey Partners and City of London Investment Management Fund (both UK based) have been slowly but religiously accumulating the stock for more than 8 months now. As at now, both of them have accumulated close to 14% of iCap. Note that the discount between the stock price and NAV has closed its gap, with just last Friday itself iCap rising 6 sen to RM2.38. Its latest NAV is RM2.96 hence still trading at close to 20% discount.

What is the probable reason? Just 2 days ago, Icap announced that Laxey Partners is requesting for 3 board seats in the next AGM on 10 Nov 2012. Read below properly.

Laxey Partners is requesting for 3 board representatives, iCap countered back with 2 others (besides some who are up for reappointment) where one of them is a former CEO of F&N Malaysia (now I can see some links as iCap does hold F&N). iCap currently has 6 directors and the maximum allowed under its Article of Association is only 7. Hence, already there is a small war here as some names will not end up as directors at the end of the voting. And as you can see this war could turn major. It could go to as far as the fund being liquidated.

The question is with the representation from Laxey assuming that it manages to get its representatives into the Board, what could potentially happen. Dividends and even liquidation comes into my mind. As I have mentioned before, the reason why some people are not interested in this closed-end fund is due to no dividends paid by the management. It seems that there are other reasons as well, such as fees.

I am not surprise by the management's decision not to pay dividend as their income are measured by the NAV (x 1.5%) annually consisting of management (0.75%) and investment advisory fees (0.75%). The more dividends it pays, the lesser the NAV. Hence, it is rightly so that it protects its turf by not paying.

Management fee of 0.75% per annum
Investment advisory fee
Now, the irony is that Laxey Partners under Andrew Pegge did the same thing 5 years ago on Amanah Millenia Fund. Laxey basically accumulated up to 19.41% of Amanah which was then trading at a similar huge discounts to its NAV as well and basically garnered enough friendly votes to liquidate the fund. The only difference was, Amanah was not a well-performing fund. iCap is.

Same story re-hatched from Amanah Millenia Fund 5 years ago?

How will the war penned out?

Actually, I don't know. Based on the statistics of shareholders, I am not sure who will support who. The thing is that Capital Dynamics Asset Management and several directors collectively hold around 3% of the fund. They will have friendly parties but I think that the bulk of the shareholders are pure shareholders who basically invest for long term. Nevertheless, I do sense that the situation could be quite dire for Capital Dynamics.

I have tried looking at the movement of shareholders. Over the last few years, the number of holders actually consistently decreased, which is not surprising as some are just taking profits while others were not willing to wait. They could have been the weaker and shorter term holders.

No of shareholders as presented in its Annual Report
In what situation can the fund be terminated? I do not have the Article with me but I am guessing that it will need 75% approval from shareholders through a special resolution. See below.

The only thing I can find on the clause for the fund's termination from prospectus

First things first though, which is the appointment of directors - what will happen in the coming AGM? I don't know, but if the fund is going for liquidation, I think most neutral investors may opt for it as immediate return would just overwhelm long term wait, at least in this case - which means they would be supporting Laxey Partner, the gwailo fund company. Hey! Over the last few years iCap has not been doing much and investors can just take the money and and buy F&N, PDB and Parkson themselves, if they want to.

Another thing, I have a feeling that this presents trading opportunities at this moment, as some people might want to snap up the shares so that they can be strong enough to fend off any decisions to take away the funds. Hence, if Capital Dynamics is really in defense mode, the shares may in fact trade right up to just a slight discount from its NAV. I am actually surprise why Capital Dynamics does not see this earlier though. To me, if it really is terminated, just represents a big blunder on the part of the management. To me, if the existence of the fund is under attack, the management has got to provide more than managing it well - after all they are being paid very well.


Winnfield said...

It would be a very interesting development going forward. Over the years, iCap has had questionable corporate governance but it does not fail to deliver performance. As a shareholder of iCap, I do not want the fund to be winded down. Why kill the golden goose that lays the golden egg? The persistent undervaluation of iCap shares worries many impatient minority investors. I have read from investing forums which many users comment on how iCap would never trade at a premium again. The level of bearishness is unbelievable.

The introduction of three board directors by laxey partners is a good move to balance out the boardroom status. Based on historical protocol taken by the hedge fund, we could chart how the story will turn out. A share buyback and dividend would be proposed. This could be myopic as excessive share buybacks and dividends may reduce cash level which means less absolute performance should the opportunity arises. The bottom line is a catalyst is in place to unlock the value in iCap. It is indeed a great trading opportunity for investors engaging in arbitrage situations.

felicity said...

Its time to be at the AGM!

Emperor said...

Out of curiosity, why do you say that the management is being paid very well ??

To Winnifield - Icap has questionable corporate governance ?

felicity said...

the management fees are paid out of the NAV, Last year was RM5.8 million

Voyager8 said...

Laxey is known for attacking UOB in Singapore's United International Securities (UIS), Alliance Trust in UK, 3i Group, and many more.

Google the keywords to find out more.

Do you want to welcome them to ICAP?

Winnfield said...

When the board is comprised of friends and buddies of TTB, you begin to wonder whether the board will act on the best interests of the shareholders.

InvestorOnHigh said...
This comment has been removed by the author.
InvestorOnHigh said...

Some of the really big companies don't pay a dividend. Google, Amazon, Apple (Thou they recently agreed to pay @2.65 quarterly which would have never happened if Steve jobs was still around). So just because they don't pay a dividend doesn't make it a bad investment.
And who is to say what the new board members will propose. This might be the end of a great investment :(

Just a quick search on the new Directors & Laxey Partners will show you what they have done to companies
- Saffron Fund
- Amanah Millenia Fund
and other funds which they are trying to liquidate. These ppl are very sleezy!!

Shongz said...

ICAP has never fail to deliver since from the beginning and people invests in ICap is for long term.

The motive by Laxey Partners are clear, to liquidate and the undervalued fund and gain instant profits. No doubt it is killing the goose that lays the golden egg.

The moral of the story is clear, will people learn from the it is another thing.

K C said...

In investing, we want to obtain good return. Don't get emotional. TTB has done a good job for icap, no doubt about it. But icap price is undervalued. We want this value to be unlocked, and then only we get better return. I don't care who will do the unlocking, I will support him. Just remember, icap existing board and TTB will definitely consider their own personal interest, not yours. This is called agency problem. Kill the golden goose? Come on. If an undervalued stock is privatized with 25% premium to minority shareholders, you as a Minority shareholder, will you take it. I will and with the money, I can look for other undervalued stocks.

Peter Lim said...

Laxey does not have the intention to liquidate the fund. They simply want the stock price to rise to reflect its NAV so that departing shareholders can sell them at its NAV, or somewhere near to it.

The best way to achieve this is thru share buybacks, which increases the NAV per unit for all maintaining shareholders, while provides a good price for departing shareholders.

The only bad thing is to CDAM or TTB, because with share buybacks, the fund shrinks (although the number of shares shrinks more, but that's not the concern of CDAM or TTB), since his management fee is calculated based on Fund Size, and NOT performance of NAV.

Here's the letters by Laxey :

K C said...

Agency problem loh! Whose interest TTB cares about? Your? Go dream!