Wednesday, 7 November 2012 fund manager threatens to quit

Article from The Star: fund manager threatens to quit if hostile party members win board seat

“I will resign.” This is the ultimatum Tan Teng Boo has given to shareholders of Bhd if even one of the three people he considers as part of a hostile party gets elected to the board. Capital Dynamics had on Monday couriered a letter to shareholders stating that the asset house would quit as the fund manager and investment advisor to should either Andrew Pegge, Lo Kok Kee or Low Nyap Heng obtain a board seat at its AGM on Saturday.

iCapital is the only holding in Malaysia that I still have, and the above is not good news. Minority shareholders in iCapital should not be pressured in this way to vote regarding directors. The shares of iCapital trade at a persistent discount to NAV, and it is good for the minority shareholders if there is an opportunity to vote a director in, who can give advice to reduce the discount. This could for instance happen through a share buyback plan, in which shares are bought back and held in treasury, as long as they trade at a certain discount (say 10% or worse). He can possibly also bring insights why the shares are trading at a discount, why the public doesn't value them correctly. It might just be a case of needing more Public Relations, since the fund has actually done quite well since inception, relative to the KLCI.

"Serious investing" wrote good articles about this issue here and here and Salvatore Dali (Malaysia Finance) here.

The remainder of the article in The Star:

They would only require a simple majority to be voted through, Tan told a briefing.

Two weeks ago, a shareholder by the name of Evelyn Ho Lai Ming with 50,000 shares nominated the three people for board positions, triggering talk of a hostile takeover at Malaysia's only listed closed-end fund and driving up its shares to RM2.56 yesterday from a low of RM2.29 last Wednesday, with trading volumes rising in tandem.

Lo and Low were aligned to Pegge, who is the founder and a director of Isle of Man-incorporated hedge fund Laxey Partners, StarBiz reported yesterday.

Pegge 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.

Laxey has a track record of targeting listed funds that trade below their net asset values (NAV).

Together with Lo, Pegge had embarked on a similar move in Singapore last year, taking a position in Singapore Exchange-listed closed-end fund United International Securities and seeking board representation on the basis of championing a narrowing of the gap between the latter's market price and its NAV.

Laxey has been a shareholder in since 2010 but recently upped its stake to under 6.9%, making it the company's single-largest shareholder.

Another substantial shareholder with a 6.5% interest is City of London Investment Group, a fund that specialises in investing in closed-end funds which offer exposure to emerging markets.

Combined, they own 13% of, but it is not known if Laxey and City of London Investment are acting in concert.

However, these events could trip up plans by Tan, a seasoned and respected investor, to launch the world's first dual-listed closed-end fund, a project he has been developing for the past three years.

“Our shareholders asked us in 2009 to work on something that would allow them to invest globally. We have since then been working to structure a global fund. It has cost us RM1.5mil so far, not a sen of which we have charged to the fund,” he said.

Tan added that Capital Dynamics had received the approval of the Securities Commission to submit an application for the fund, which would be listed on Bursa Malaysia and another stock exchange in the region. He declined to reveal more details as the process is not complete.

“Pegge does not realise he has found gold. We welcome him as a shareholder but not as a director.

“Should you focus on the discount to NAV? Yes. As a value investor, you should always buy undervalued stocks. But don't focus on it negatively, you should see it as an opportunity. Why buy during a sale? Because it is undervalued,” he pointed out.

In a document dated June 26, Laxey had sent a requisition notice seeking the appointment of Pegge as a non-independent and non-executive director and also to bring forward proposals “designed to substantially narrow or eliminate the discount” the shares of the company were trading at a relative to its NAV.

“Since Sept 21, 2008, the shares of the company have been trading at a substantial discount to their NAV,” it read, adding that the discount rose to 24.8% on May 30 this year.

Laxey had also sent yesterday a strongly-worded letter to the shareholders of saying it had “lost confidence” in the ability of the present board to close the NAV-share price gap.

Among others, the firm urged shareholders to vote against the reappointment of all the directors save for Pegge, Lo and Low.

According to its calculations, the comparative total return of shares for the latest financial year was a negative 4.5%, underperforming the benchmark FTSE Bursa Malaysia KL Composite Index by 10.1% after adjusting for dividend yield.

“Laxey has spoken to the company to take action on the discount to no apparent effect. Laxey had earlier proposed a resolution to be tabled at this AGM requesting the board to address the persistent discount problem, but this was rejected by them.

“In our view, one of the main reasons for the discount in to exist at such an unreasonable level is the lack of a defined policy to deal with the persistent and widening discount.

“The global closed-end fund industry has over the past decade realised that a substantial discount is not in the interest of its owners the shareholders. Incumbent boards globally have addressed the issue by instigating a series of measures which have collectively reduced both the absolute discount and discount volatility,” it said in the letter. 

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