Saturday, November 10, 2012

To many ICap's shareholders, TTB is their Oracle!

Perhaps you have heard of the Oracle of Omaha, the namesake accorded to Warren Buffett. I was at the AGM this morning, my first attendance and the thing I can say is that Tan Theng Boo ("TTB") is like the Oracle of Malaysia for many of these shareholders.

In fact, the presentation provided by TTB himself is loaded with Warren Buffett's quotes, such as - "Rule No 1: Never Lose Money, Rule 2: Never forget Rule No 1" and "Price is what you pay, value is what you get" and many more. I would say that much of TTB's investments philosophies and actions is trying to resemble Buffett's. He even claimed that to save costs, his prospectus and Annual Reports are in black and white (as color printing is more expensive) - resembling the same careful spending trait that Buffett had on his vehicle, Berkshire Hathaway.

However, few differences that tell are Buffett's Chairman's statement to shareholders consists of more than 50 pages each year and spends a lot of time explaining his investments rationale and why he invested in some of the portfolio companies. TTB is much stingier in his Annual report statement ditching out less than 2 pages each year. I think that the iCapital newsletters subscription would probably be where he is concentrating on his write-ups.

Another difference is that for of Buffett's hardcore believers, they would be willing to buy just 1 share of Berkshire Hathaway to be able to attend his AGM. (Berkshire Hathaway's A share costs USD127,000 by the way) Well, TTB is still far from that, but there are still some hard core supporters (I would think 500+ or maybe many more) as shown in the majority who supported him during the AGM.

In fact, some of them complained that the AGM this time around is time consuming and non-beneficial as most of them were there in most of its previous AGM's to obtain their annual tips from their Oracle, not to really vote. This time around, their presence are to support their oracle as the threat of resigning was too much for them to absorb. One came out to actually say, "No Tan Theng Boo, No ICap." - and its the end of the world?

I did not stay to learn about the results of this unusually extended AGM as I had to rush off to another event, but I can guess that judging from the support provided to TTB - rightly so - many of them would stay thick and thin with him - to the extent that he has become "Godly".

I would have to say, at the end of the day, I am impressed and despite the initial thoughts of voting in some of the so-called non-friendly Directors to Capital Dynamics', at last I changed my mind. However, I doubt that I can be so attached and would still be looking for opportunities to sell whenever the fund is close to its NAV - unless some of the issues that I have mentioned before are really addressed.

Whatever it is, I guess I am a different type of investor anyway, as I am the type who is hoping to control my own destiny, than relying on another to do so for me. Err someone said that already, and that someone is Jack Welch.

And hah! hopefully this is my last article about ICap for a while as some readers would be bored with these articles already. I would just concentrate on researching something else myself.


Justin said...

Laxey underestimated the bonding between shareowners and TTB established over years. Even BFM's David Chiu predicted a rough ride for TTB in today AGM. As it turned out, almost every shareowners, gave their undivided support to TTB. The sentiment was so strong that nobody dare to go against the norm.

Nighelangelo said...

surprised no uncle took the opportunity to demand for dividends.

felicity said...

These are uncle who have done well though...

bc said...

I and my friend were at AGM yesterday. And we concluded that it is more apt to call this TTB's fan club event. All loves their idol so much and simply do not listen to what the "enemy" is saying.
The issue: persistent and significant (25%+) discount of NAV is an important issue to all investors. Many have said that a large discount is great for them as they can and want to buy more. But no matter how long your investment horizon term is you will sell at some point in time. You may face with an emergency which required additional cash and have no choice but to sell ICAP shares (that you initially plan to hold for a long time) and I believe most people will be upset when he had to sell at a significant discount to the actual worth. So it is better to have the price more or less the same as the NAV, indeed it is also fairer to all.
Please read carefully Peter Lim's post on what Warren Buffett say about this and try to understand the wisdom behind his thought. Certainly every single board of directors of ICAP should read this.
I feel that the board (OUR BOARD that suppose to represent all shareholders) should have listened carefully about this genuine concern even though it was brought up by an apparently irritating and supposedly "hostile" shareholder.
Should the board listened and evaluated the issue brought up objectively, I believe the board would rightfully recognised and agreed that it is relevant and important to shareholders and explicitly stated so and what concrete actions they will take to address this. May be a special committee can be form to study about this and what are the current best practices and their relevant to ICAP case etc.
Instead it appear that the fund manager is seen to be the only person to response to this issue as evident by his many statements regarding price discount and also an apparently well studied presentation by one of the fund manager’s employee in previous year's AGM.
The fund manager had certainly expressed that he do not believe in share buyback. But the board had never expressed any opinion about this. Do they agree? Have they studied and understand about this issue? Have they critically considered the arguments by the fund manager regarding this issue?
I think we should leave the fund manager to his great job of stock picking and instead the board of directors should be the one to address this.
It appears that most had agreed with the conclusion by the FM (fund manager) that share buyback is detrimental particularly to the long term benefits of shareholders.
I would like to offer my 2 cents worth of counter considerations.
1) FM argue that the cash used to buy back shares will deprive shareholders the opportunity to compound that sum of cash at 18% annual rate (ICAP’s average rate of compounding) and that other companies e.g. Berthshire may be ok to buy back as they continue to generate new cash flow whereas ICAP being a closed end fund do not have such new stream of cash. Is this argument correct??
At 18% compound return, $1 will become $2 in 4 years time. So it is true that if RM10M cash is used for share buyback today, the NAV will presumably be smaller by RM20M in 4 years time.
BUT the RM10M cash did not vanished; it is just converted and kept as ICAP treasury shares. In 4 years ICAP NAV/per share double and so we expect its share price will also double assuming the same discount exist then. Should the discount narrowed (in fact most including the PM himself do believe it will narrow or may even become a premium) the price would be more than double. When that happens the treasury shares can be selling back to the market and used for other higher return investment.
So it appears that share buyback at a discount particularly at higher discount than the compounding rate of NAV is a no lose proposition.
To be continue

bc said...

Continue from previous post

More over when the RM140M cash is just earning 1.5% net return( deducting FM's fee of 1.5%)it is not exactly meaningful to assume it can compound at 18% while it is certainly closer to the truth that the ICAP shares bought back will compound at higher rate than 1.5%! and closer to the assumed 18% rate.
As pointed out by Peter Lim the cash used up for share buyback will reduce the NAV by the same amount and hence reduce the FM's fee which appear to be a win loose proposition and if such will not be good for all in the long run. What we want is to ensure alignment of FM and shareholder's interest. But this is only a short term lost to the FM. Longer term when the treasury shares is sold back into more cash the FM will also be rewarded.
Now let us consider share buyback in the case of non closed end fund listed companies e.g. Berthshire. It is true that Berthshire generate plenty of new cash flow yearly while ICAP does not, but it is the same  for Berthshire that the cash it used up to buy back its own share will by ICAP's FM same argument also deprive Berthshire's shareholder the opportunity to compound at Berthshire long term rate of ROE(return on equity)
Generate more new cash is not relevant in this consideration. Simply the pertinent consideration is weighing the potential return versus its attendant opportunity cost.
Hence there is really no critical difference in share buyback for close end fund vs. that of non close end fund companies.
I am sure there could be counter arguments of my common sense thought expressed above. But we should all agree that price discount is a critical issue to all shareholders and for the better of if the board recognised this and take leadership to really undertake to address this issue.

bc said...

I just realize that I read about Peter Lim's post on another blog so I paste below his posting regarding Warren Buffett thought on "why should the fund have a policy that is fair to the buyer an seller? ",

I'll let Buffett answer it for you :
"To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than a high level. Obviously, Charlie and I can’t control Berkshire’s price. But by our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational. Our it’s-as-bad-to-be-overvalued-as-to-be-undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners."

felicity said...

Thanks BC, but it does not seem that the management is keen to address any of that issue. The huge discount is a sign of people's loss of confidence in the management and board's resolve to address this - although they would never admit it.

I was mentioning of reducing number of shareholders of ICap over the years, and one guy who was appointed to be a director later mentioned that it is good as it eliminates the number of disgruntled or shareholders who only look at short term. My question is, really?

It does seem like TTB is losing supporters little by little although the ones that support him over the long run were there and still hold on to the shares.

bc said...

Indeed as articulated by Warren Buffett above the best way to attract the appropriate shareholders and discouraged those vulture like shareholders is to have an appropriate and effective policy that will effectively narrow the gap between price and NAV. Again this mean price discount is an important issue for the icapital board to work on.

Justin said...

Guys,let be patient and wait for dual listing plan to kick start by next year as promised by TTB. Let him prove himself out. Until next AGM, we shall cross the bridge when times come.
Laxey's attempt is proven to be haphazard and ill prepared. They deserved the outcome.
Felicity is keeping a good mix of portfolio, hope that more people could notice that. Malaysia needs more TTB.

Peter Lim said...

Malaysia needs more people like Warren Buffett, NOT people that keep saying he's "Malaysia's Warren Buffett, keep saying he's pro share owner, but lack of action that is pro share owner".

I'll go for lesser of those people not just in Malaysia, but on Earth as well.

shrobin said...

ICAP is founded by TTB no doubt, but technically, TTB is still a paid fund manager only. The appointed board is supposed to represent the share holders and stated their stand on the issue on “discount” and what they are going to do about it. Until now, I still have not see the board come out with any “policy” to address this issue. Or they feel is not their job!
If you don’t want to attract hostile parties, then do something on the discount. No point to cry baby when in the first place you have created the conditions to attract these guys. So, it is still in the interest of TTB, Board and Share Holders to address the discount issue. The board should take the lead; otherwise, it is a “NAB”.

yhtan said...

There are 7 directors in the board and yet TTB is the one making speech and decision?

Then what is the purpose of shareholders pay them director fee for?

Those TTB fan club event need to wake up and realise what problem they are in instead of supporting blindly.

skng74 said...

I noticed this year's AGM commanded a lot of attention & focus from a lot of people, ranging from media, shareholders, Tricor, etc. This all stem from the fact that we've a single largest shareholder in Laxey who is vocal. Although their track record is questionable, I felt their presence is good enough to make TTB and the Board sit up and be attentive. For too long they may have been too "comfortable" in their seats. Malaysians are not known to be vocal in their opinions so I welcome these 2 foreign funds as shareowners. At least TTB will know that his actions or inactions will be watched closely.

As for ICAP paying dividend, personally I don't favor it because then it'll attract 25% corp income tax. I would rather go for REIT since it is only taxed at 10% (for now) and comes with a reasonably good yield.

I guess if really not happy then just take our money go elsewhere.

Winnfield said...

I feel very disappointed with the outcome of the AGM. I like to question the shareholders who voted for TTB friends and buddies whether the decision is made out of emotional factors or out of logical reasonings based on cold hard facts.

It is frustrating to see the TTB camp turn the tide around by threatening shareholders to quit. I believe there are many arguments which are in the favour of a share buyback but the TTB fanaticism is just too strong among the loyal shareholders.

iCapital fund poor corporate governance is for the public to witness. Where are the independent directors to back the shareholders up when such an important issue is raised? The only positive outcome from the AGM is information about dual listing of the fund. We definitely do not know whether the discount will narrow and we also do not know the fund manager will double charge its fees upon dual listing.

K C said...

Haha, you guys are the minority. As felicity said, TTB is the Oracle. What he says is like written in Bible. Who are you to dispute that. But frankly, did CDAM really did so well for the NAV of icap? Forget about the share price. Read on.

C:\Users\Su Lyn\Google Drive\icap 15112012.pdf

K C said...

Tan Teng Boo made the following statement during the last AGM saga.
“My 18% growth which I have built up may be gone. Our NAV has gained 189% since listing or 18% per annum. At such a rate, in seven years time, it would be RM8.78. We give consistent long-term returns,”
The first part of 18% per annum gain of icap is 100% true but the main reason I bought quite a bit icap shares was because it was selling at a discount of >25% then. I have sold most of it with good gain, thanks. But how many people go deeper to analyze if CDAM really have done such a fantastic job for its shareholders as professed through the hero worshipping of shareholders and the ultra arrogant behaviour of TTB against the very people who employ and pay him his fees? I did and here I would like to share with you.
The gain of 18% pa of icap’s NAV over the 7 years period from inception to now (October 30 2012) outperformed KLCI of 12.0% (including dividend) by a wide margin of 4.8%. However a closer look at its performance shows that all the outperformance was achieved in the initial period from inception up to 3 January 2008, when its NAV improved by 126% compared to 60% of KLCI.
However, soon after that, in tandem with the decline of the world markets and KLCI, icap’s NAV declined to its lowest at RM1.42 on 31st October 2008. After that NAV increased steadily again to RM2.96 on 2nd November 2012. However since the peak NAV on 3rd January 2008, the CAR of icap NAV is only 5.9%, closely follows the total return of KLCI of 6%. Even from the low of the market on 5th March 2009, CAR of NAV of icap to 2nd November 2012 of 21% doesn’t match up with the total return of KLCI of 22% per year. Where is the hot hand of TTB during this period? Was it just a temporary phenomenon happened by some luck factor in the early days?
However, in terms of share price performance, I am afraid that icap’s return of 12.6% per year for the entire period is not much better than that of the return of the market of about 12.0%. Worst for those people who bought icap near its peak 5 years ago. The share price on 2nd November 2012 is 10% below then, or at a loss of 2% pa. During the same period, return of KLCI was 6% a year. This means the share price of icap underperformed the market by huge 8% per year.
So TTB, are you sure of what you said above that your return is consistent, and that you could continue to increase NAV consistently at 18% pa for the next 7 years to make icap share at RM8.78 in October 2019? If that is achieved, I would agree that you would be one of the best fund managers in the world as claimed by you in an AGM some years ago. It is not easy lei. For the shareholders of icap, I think your investment will be really, really, really long-term.
As it turned out, the highly publicises AGM board tussle was a non-event. The “enemy” was defeated convincingly by 87% majority. Throughout the AGM, shareholders were seen expressing their thanks to TTB and assuring him of their backing. One of them even asked to give him a standing ovation, which the floor mostly obliged.
“Without Tan Teng Boo, is nothing!” a shareholder exclaimed. Yes, to most shareholders of icap, TTB is their Oracle!
Well, it really beats me. The Oracle of Bursa Malaysia!

paperplaneinc said...

I have different view on Icap's portfolio

K C said...

山下聖人, I don't think you should doubt what stocks TTB has picked as he has proven that he did the right thing. He must have done thorough analysis on them and made the right move of buying them. Many of your picks i have different view too. For example, Perisai is a "sai" for me. It is more of a stock fried by insiders for their distribution, in my opinion. All banking stocks too me are always fully valued. Property stocks, yeah maybe undervalued by "can see cannot eat". etc. No, I am not saying your opinion is wrong, and I am right, Not at all. But TTB was proven right. The problem with TTB is why did he keep so much cash the last three years when opportunities was abundant in equity investment? Wait for appropriate opportunity, or more precisely market timing? Value investors look for value stocks, find its intrinsic value, and then buy at a comfortable margin of safety. Weren't there heaps of value stocks in the market in the last three years? So it end up its performance for the last 4 years plus was just mediocre (read my above analysis). If not for his hot hand the first three years, icap shareholders would not be so kung ho about him. But to me that is ok also because investing is really not easy. TTB has done reasonably well for the whole period. We just can't single out individual period and criticize him. what I am not happy is that he as a fund manager employed by shareholders us, shouldn't be that arrogant. And it really beats me that so many shareholders treat him like an Oracle. You seriously think that he can consistently give you the 18% return after fees for the next 7 years? Not me because again it is not easy. The industry is such that.