Tuesday, 6 November 2012

iCAP the Undervalued Closed-End Fund. What will be its outcome?

Here is an article to understand the events happening in iCAP at present.  Closed-end fund often trades at a discount inviting predators that are after short-term quick gains, rather than long-term bigger gains.

Canny Money Manager Spots Prey: the Undervalued Closed-End Fund

July 09, 1988|DAVID A. VISE | The Washington Post
ANNAPOLIS, Md. — It seems an odd place to plot the next wave of hostile takeovers.
But there in his airy Annapolis living room overlooking the calm waters of Crab Creek, Bob Gordon speaks of financial war. His prey: the investment companies known as closed-end mutual funds whose undervalued shares offer opportunities for short-term trading profits.
Gordon, a 35-year-old money manager who splits his time between Annapolis and Manhattan, is remarkably candid about potential takeover targets. "Scudder New Asia Fund is an obvious one to go after," Gordon said. "Scudder gave in on one before."
Identifying profit-making opportunities with relatively low risk is Gordon's specialty--and he pursues it day and night. With his fiancee sleeping nearby, Gordon regularly studies the tax code and other documents until 2 a.m., dreaming up new ways for clients of his New York-based Twenty-First Securities Corp. to boost after-tax returns.
"I see little glitches," he said. "When I was 12, I knew I wanted to do this. I like math, and this is a practical application of math. It is fun for me."
Gordon believes that he has identified a glitch in closed-end funds that makes them vulnerable to a hostile raid.
Unlike the more common open-end funds, a closed-end fund sells a fixed number of shares to the public and invests the proceeds in stocks and bonds.
Price Reflects Value
In open-end funds, investors buy their stake from the fund and sell it back whenever they wish. There is no limit on the number of shares, and the price reflects the exact value (net asset value) of the stocks, bonds or cash held by the fund at the time of a transaction.
Closed-end funds are more like industrial firms whose shares trade on stock exchanges--the price for a fund's shares is primarily determined by the demand for the fixed number of shares. Investors consider the underlying market value of a fund's holdings, but share prices for the funds are also influenced by expectations, emotions and other factors that often affect prices in the stock market.
Many of the closed-end funds are vulnerable to a takeover maneuver these days because the shares of these funds are trading at discounts of 20% or more below the market value of their holdings. The Securities and Exchange Commission recently launched a study to determine why these discounts exist.
To their horror, uninformed investors often find that shares in new closed-end funds quickly drop below their initial offering price and may continue to remain significantly below the market value of the fund's holdings.
There are several reasons.
First, the initial price includes substantial underwriting fees paid to the brokerage firms that market the shares.
Second, while these brokerages may support the price through active trading in the days immediately following the offering, the firms typically retreat soon after and use their capital elsewhere. Once the firms are no longer supporting the price of a closed-end fund, it typically drops.
High Management Fees
Another common factor affecting prices of closed-end funds are high management fees, which reduce returns, said Thomas J. Herzfeld, a Florida-based closed-end fund expert who is working with Gordon on possible plans to restructure closed-end funds.
What Gordon has in mind is the forced conversion of publicly traded closed-end funds to open-end mutual funds, or, in extreme cases, the forced liquidation of closed-end funds.
Gordon speaks of buying shares in a closed-end fund, presenting a restructuring proposal to fund managers and then giving the managers a severe "this is your one chance to save your jobs" warning. "Some of the guys are waiting for it to happen to them," Gordon said.
Although these strategies are not risk-free, they could produce stock trading profits for Gordon and other closed-end fund investors.
The conversion of an undervalued closed-end fund to the open-end variety creates the profits, according to Gordon's strategy. By definition, an open-end mutual fund trades at a price that reflects the market value of its holdings. So the price of an undervalued closed-end fund will rise if the fund is converted to an open-end fund.
Closed-end fund managers may oppose conversion for several reasons. First, they receive a management fee that is a percentage of total fund assets. After a fund is converted to open-end and the price rises, Herzfeld said, many fund investors typically sell, shrinking assets under management and management fees by one-third.
Fund managers may also oppose conversion because of a belief that an open-end structure--which requires them to redeem investor shares on demand in cash--will hurt the fund in the long run.
Criticism of Tactic
Nick Bratt, president of the Scudder New Asia Fund--mentioned as a possible target by Gordon--said that an open-end structure could hurt the fund in the long run by forcing it to raise cash by dumping stocks of small, growing companies at inopportune moments.

Tuesday November 6, 2012

Hostile takeover of iCapital.biz?


PETALING JAYA: Closed-end fund iCapital.biz Bhd, managed by seasoned fund manager Tan Teng Boo, has become the target of opportunistic investors who may embark on a hostile takeover of the company, insiders close to the matter confirmed.
European hedge fund Laxey Partners has accumulated close to 10 million shares in iCapital.biz, representing just under a 6.9% stake. Laxey has a track record of targeting listed funds that trade below their net asset values (NAVs).
It is fairly common for institutional funds that have bought stocks of closed-end funds trading at a sharp discount to their NAVs to vote for their liquidation.
A request has been put forward to iCapital.biz to have one Andrew Pegge made a director of the company, along with two others Lo Kok Kee and Low Nyap Heng. Shareholders will vote on this at iCapital.biz's coming AGM this Saturday. As such, the AGM is being touted as a must attend for all shareholders who will no doubt be presented with arguments from both sides, namely the current management of iCapital.biz, headed by Tan and from parties associated with Laxey.
Pegge is the founder and a director of Laxey and has been embroiled in bitter shareholder disputes in the past. He has been described as a shareholder activist and manages funds that look to take advantage of “discount volatility” in investment trusts.
Together with Lo, they had embarked on a very similar move in Singapore last year, taking a position in SGX-listed closed-end fund United International Securities (UIS) and seeking board representation on the basis of championing a narrowing of the gap between the market price of UIS with that of its NAV. Laxey and Lo have also embarked on similar efforts in Malaysia in the past with Amanah Millenia Fund and Amanah Harta Tanah PNB2, respectively.
Another substantial shareholder has also emerged in iCapital.biz, in the form of London Investment Management Co Ltd, with a 6.5% stake. It isn't clear if this fund is in cohort with Laxey but they are both the largest shareholders in iCapital.biz, collectively owning at least 18.7 million shares (or 13.4%) out of the total 140 million iCapital.biz shares.
Although far from having a simple majority of iCapital.biz shares, this combined stake does wield some power considering that the remaining shareholders of iCapital.biz seem to be spread out.
According to iCapital.biz 2012 annual report, it has more than 3,000 shareholders. But about 65.8% of its shares are held by about 2,000 minorities who hold between 100-10,000 shares. Tan's Capital Dynamic Assets Management Sdn Bhd, which manages the closed end fund, has only 689,000 shares or a 0.49% stake.
Sources close to iCapital.biz 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.
In what is seen as a defensive mode, iCapital.biz has put up two individuals to be elected to the board, namely Datuk Tan Ang Meng, the former CEO of Fraser & Neave Holdings Bhd and Dr Yin Thing Pee, a medical specialist.
iCapital.biz shares have seen some active trading this week and hit a 52-week intra-day high of RM2.56 yesterday and then closing at RM2.49, up almost 9% from early last week.
iCapital.biz has had a decent performance since its listing in October 2005, with its NAV rising from 99 sen then to RM2.95 as at Oct 24. The performance of its share price has also outpaced the FBM KLCI. However, its stock has traded below its NAV, a gap which earlier this month stood at about 30%. The gap has since narrowed to around 19%.
iCapital.biz's ethos is to allow long-term shareholders to benefit from value investing and is helmed by the respected Tan, who is a sought-after commentator of economic and corporate affairs. Laxey though is likely to put forward a simple and pragmatic suggestion to iCapital.biz shareholders: liquidate your company and cash in at its NAV (or close to it).

Using closed-ended funds

Closed-ended funds can be used
  • to build out a portfolio or
  • add specific components like international exposure.

Patient value investors seek not only a good price (meaning a good discount), but also a fund with solid long-term potential.

Many pros use closed-ended funds, including Warren Buffett.
  • In 1972, Source Capital was trading at nearly a 50% discount to NAV. Buffett purchased almost 20% of the outstanding shares.
  • Though the price fluctuated in the interim, Buffett hung in for 5 years before selling for an estimated $15.7 million profit.

1 comment:

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 : http://peterlim80.blogspot.co.uk/2012/11/letter-to-shareholders-of-icapitalbiz.html