Monday, November 5, 2012

My take on the ICap debacle

I am a shareholder of ICap. So are my family members albeit small shareholdings. I think by now you would already received notice from the management company, under Tan Teng Boo who is asking you to consider long term investment vs short term return.

I am a long term investor by nature. However, the main reason why I have invested into ICap was mainly due to its share price was way underpriced. At the time of my purchase it was at 26% discount. Another reason is that it is a long term fund which suits me.

As mentioned during my purchase, I was not considering dividends either but as long as the fund manager protects the interest of its shareholders. I have read of commentaries that the fund has stocked up with "yes men" in its board, which to a certain extent is true. In fact, ICap has added 2 directors after my purchase - one from the ex-DAP fame (Tunku Aziz), another from UMNO - Dato Dr Noraesah (both whom I do not like). Naturally, most companies do appoint their friendly directors, if they are allowed to and if minorities do not make any demands. ICap's shareholders have never demanded anything, which is why there have not been any share buybacks despite the fund trading at huge discounts, provide dividends, capital return etc.

One of the commentators mentioned that Warren Buffett has never provided any dividends from his trademark Berkshire Hathaway. True. However, recently whenever the company reaches below 110% of its NAV value, he commenced buyback of the company as he deemed that the company was way undervalued. Whenever the share price trades above 110% of NAV, he will stop the buyback.

Now, my mistake as well as Tan Teng Boo's (read one of his quarterly) is that we thought Laxey Partners is there to support the management. It may not seemed to be or is the fund acting as activists fund?

My say is that for those who are going to the AGM, hear both parties out. Having alternative board members in the board may not be a bad thing as it actually allows better corporate governance. Yes, most people are for their own investments. Who aren't? I am, as in protecting my own investment as well.

Tan Teng Boo with Capital Dynamics has done well for iCap, but that is not a license for him to do anything. As I have said, he is paid with a very good fee and last year alone he was paid more than RM5.9 million based on 1.5% x NAV + fund manager's fee.

The right decision to do when the fund was way undervalued was to do share buybacks (if the AA allowed to). Although being a smart investor, he did not do that, and as a shareholder, you should ask him why rather than agreeing to all that is done by the management company.

My say is let's hear all parties out. Do not blindly appoint your directors. Besides 5 seeking elections, there are actually 4 more seeking re-appointments. Just remember, it is not just about the 5 seeking elections.


K C said...

felicity, excellent writeup. Your view on icap is exactly the same as mine. Just discovered your blog when I was searching for icap information.
I would say your blog is one of the best local blog I have found. Much better than many high profile ones. Jia yew.

Long_Term_Guy said...

If you wanted to eat the rambutan fruit, do you chop down the tree to get the fruits? Or do you keep the tree and enjoy the rambutan season every year? If you now had a bar of gold in your hand, do you liquidate it today? Or do you keep it and let it appreciate year after year? Remember, if you chop the tree down, it will be gone forever.

Long_Term_Guy said...

Sources close to said that Tan was very concerned about the moves to have new members on board and will consider stepping down if shareholders were to give in to the request.

felicity said...

Is he allowed to resign? This is a fund created by Capital Dynamics and he is the name behind the company anyway. Because there are additional directors who may not be in consensus, this is the reason to resign?

Check the prospectus, he is the name behind this fund and because of this request for board seats, the person resigns reflects very badly of the person.

K C said...

I used to have great respect for TTB for his prowess in investing. He has done extremely well in raising the NAV of icap, much much more than the market. But this threat of resigning? Plain childish!

K C said...

Aiyah, forget to continue below in my last comment.
If TTB steps down, don't worry, step in felicity. I like to joke but this is not joking. I just started to read your postings. You follow a sound investment principle and proper investing process, and not using some weird pseudoscience. You are also a modest person. You have made good money yourself, definitely not by chance. Seriously, very hard to find a good investment blog like this. I like to clarify here I am not trying to bodeh you.

felicity said...

Thanks but Let's not go there. TTB is a very successful fund manager as well as one of the top investment advisor in Malaysia.

Just that, I see no harm in having minority board interest as it allows the gap between share price and NAV value to reduce. The fund manager and investor may have different needs.

The fund manager gets paid every quarter while the investors will depend on the share price at the end of the day whenever he / she needs to sell or buy despite the long term view.

a fund with long term view may not necessarily be suffer today and we hope to get better consistent return over the long run but rather looking at the investments with a longer term objectives.

Like i said, I am ok with no dividends but sometimes smarter decision is with buyback when your own stock is ridiculously cheap. That's not even long term or short term view.

InvestorOnHigh said...

I do agree with the agency problem and having a good mix of independent board members will promote good corporate governance. Provided the board looks out for the best interest of the share holders and long-term prospect of the company. But I do have to say that in search for change we might go the wrong way and land up killing a good fund.
Childish or kiddish if it was me I would rather take the high road and stay away to avoid conflicts rather than be in the midst of a board that could not come to a consensus!!
What would you do?

Peter Lim said...

So good write up.

The problem with share buybacks is that it's Against the interest of the fund manager because reduced fund size means reduced fees.

One way to correct this is to change the fees from 1.5% of NAV to purely performance above KLCI plus Dividends per unit.

That would be interesting, and at that time, see if he agrees to share buybacks or not!

Alternatively, ask him to invest half of his money in icap, side by side with alll the share owners. Then see what he'll do since 50% of his net worth is there.

ted said...

I think part of the reason for under valuation of icap biz is because of what happened with the way overperformance fee was charged for the International global assets fund sg and au fund. so I do not suggest an outperformance fee for the icap biz fund