Wednesday, 7 November 2012

I throw my support for Tan Teng Boo to maintain the status quo in iCAP.

I welcome shareholder activism in iCAP.  This can only be good for this fund.  However, given the short notice of this new development, it would be good to understand the issues deeper.

Questions I pose to myself:
  1. Has iCAP outlived its usefulness and its breakup or liquidation be beneficial to existing shareholders for the long-term??
  2. Has iCAP managers proven themselves incapable of making a decent return?
  3. Would iCAP having a dividend policy be beneficial to the long term investors of this fund?
  4. Would iCAP buying back its own stocks that are trading at a discount necessarily improve market price of its stock?

1.  Has iCAP outlived its usefulness and its breakup or liquidation be beneficial to existing shareholders for the long-term??
iCAP was started in 2005 with a set philosophy laid down by Tan Teng Boo.  The early investors of iCAP subscribe to his philosophy.  The fund was set up to enable small shareholders to invest in the stock market managed by a proven fund manager.  There is a need for such fund to exist.  Therefore, iCAP plays a useful role for those small or big investors whose investing philosophy are aligned with that of Tan Teng Boo, its fund manager.
Therefore, my answer to Question 1 is NO.

2.  Has iCAP managers proven themselves incapable of making a decent return?
We should be wary of short term performances of funds or any investing.  The market volatility can be such that the performances of the short term can fluctuate widely.  Nevertheless, it is the long term return one should be focus on.  On this point, iCAP has more than delivered on its promise at inception to those who are long term invested in this fund.  It has delivered 18% compound annual return in its NAV since 2005.
Therefore, my answer to Question 2 is NO.

3.  Would iCAP having a dividend policy be beneficial to the long term investors of this fund?
iCAP has delivered compound annual returns to its shareholders 18% since inception.  Given its excellent performance since inception, it is rational and logical to retain all earnings to compound at these high rates of returns to grow your networth.  In any case, this objective was stated clearly by Tan Teng Boo when he started this fund.  
Therefore, my answer to Question 3 is NO.

4.  Would iCAP buying back its own stocks that are trading at a discount necessarily improve market price of its stock?
Share buybacks offer advantages and disadvantages.  However, these too do not guarantee that the discount to NAV of the fund will narrow either.  It is not unknown that there are companies that bought back their own shares with little impact on their share price.  In fact, for many, the stock prices even continue with their relentless decline driven by fundamental reasons.  Share buybacks by companies of their own shares are not without their controversies and complicities.
Therefore, my answer to Question 4 is NO.

Tan Teng Boo should mobilise the investors who share his philosophy who are long term invested in his fund to defeat the challenge posed by Laxey Partner.
Hopefully, he will be successful.  After having survived this in the 8th AGM, he will have time to rethink and continue taking this fund to a higher level of performance.  It is far better for Tan Teng Boo and the Board of iCAP to concentrate on investment performance than to worry too much over how to shrink the discount to the NAV of the fund which they have some or little control over.


Anonymous said...

Part of the Problem of the large discount is because of the way he charged the outperformance fee in the ICap Global fund and the Au fund. Basically the trust in him may have deteriorated so there is a need for governance to protect the minority shareholder

Anonymous said...

Comparing share buyback for a closed-end fund and share buyback for a company is like comparing apple with oranges.

Peter Lim said...

Feeling lost and unsure what to vote in the coming Bhd's AGM ? Do read what Buffett have to say, and i really hope Mr Tan Teng Boo will read this and act in the interest of the share owners, NOT JUST SAY (like mentioned by Buffett below).

"The companies in which we have our largest investments have all engaged in significant stock repurhases at times when wide discrepancies existed between price and value. As shareholders, we find this encouraging and rewarding for two important reasons - one that is obvious, and one that is subtle and not always understood. The obvious point involves basic arithmetic: major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. When companies purchase their own stock, they often find it easy to get $2 of present value for $1. Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended.

The other benefit of repurchases is less subject to precise measurement but can be fully as important over time. By making repurchases when a company’s market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management’s domain but that do nothing for (or even harm) shareholders. Seeing this, shareholders and potential shareholders increase their estimates of future returns from the business. This upward revision, in turn, produces market prices more in line with intrinsic business value. These prices are entirely rational. Investors should pay more for a
business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer. (To make the point extreme, how much would you pay to be a minority shareholder of a company controlled by Robert Wesco?)

The key word is “demonstrated”. A manager who consistently turns his back on repurchases, when these clearly are in the interests of owners, reveals more than he knows of his motivations. No matter how often or how eloquently he mouths some public relations-inspired phrase such as “maximizing
shareholder wealth” (this season’s favorite), the market correctly discounts assets lodged with him. His heart is not listening to his mouth - and, after a while, neither will the market."

Surprisingly, this 3 paragraphs was written by Buffett in 1984 letters to his Berkshire Shareholders. [ Source: ]

Mr. Tan Teng Boo, if you're reading this, i'm sure Warren Buffett don't mean you since he wouldn't know what's going to happen 28 years after writing that article. But don't you agree his words of advice is timeless?