Sunday, 16 August 2015

iCapital: "Ostrich policy" will not solve the issues

I have written several times about iCapital (of which I am a long time shareholder), most notably here and here.

The two elephants in the room regarding iCapital's share performance are:
  • Persistent underperformance relative to its benchmark (KLCI) since 2008
  • Persistent discount to its NAV price since 2008
The new year report has been published, so I was interested to see how the company handles both matters. Well, the way the issues are handled is best described by the below picture:

"Underperformance, discount ...... I don't see any ...... do you?"

In the Netherlands this is called "Ostrich Policy": "to ignore obvious dangers or problems and pretend they don't exist; the expression derives from the supposed habit of ostriches to stick their head in the sand rather than face danger".

Lets start with the results for the latest year:

That is really disappointing, given that the funds cash level was a whopping 65% throughout the year. That cash is generating interest of about 3 per cent a year, so one would have thought that the fund would have performed clearly better than the KLCI.

One reason for this is the management fee (including relatively high expenses for advertisements and AGM), the total is about RM 7 Million. That translates to about 1.75% per year, which is not a problem if the fund is fully invested and outperforms. But it is a problem if 2/3rd is held in cash, earning about 3% per year on that cash, of which more than half is eaten away by fees and expenses.

Given the persistent high cash level, the board of directors should renegotiate the management fee, for instance a lower fee for the cash it is holding (one does not need a degree in rocket science to manage a fixed deposit), and a higher fee for the equity part. However, no indication is found in the year report that this is even considered.

All the outperformance of the fund came in the first few years. The last seven and a half years the fund has underperformed, especially if dividends are accounted for. The combined effects of the underperformance and discount is shown in the red column, showing that the share price has actually decreased since December 31, 2007.

One must therefore put question marks behind the comment by the Chairman:

Also puzzling is the comment regarding "shorter-term options which do not benefit share owners in the longer-term", how is it possible that company decides this for its share holders?

On December 31, 2013 the NAV was around RM 3.10 while the share price was around RM 2.47 for a discount of around 20%. Apparently the fund manager could not find enough value and decided to raise cash levels to 50%. If the fund had decided to discontinue and return back the money to shareholders, surely share holders would have been in a much better situation than currently (the share price is now RM 2.18).

iCapital continues to harp on its performance since its IPO. But which percentage of the shares is actually still held by the same persons who bought them at the IPO? If people bought their shares say 1, 3 or 5 years ago, would they not be interested in the performance over that period, instead of the performance since IPO? The performance over those intervals are simply disappointing.

Another puzzling comment is the following:

There is absolutely no need to seek for viable options to address the discount, they have been conveniently listed in iCapitals IPO brochure, as described in my previous posting:

  • Shareholder activism: this is very ironic, given the way the fund and its manager have responded so far on any attempts in this direction (for instance here)
  • Share repurchase: in my opinion an excellent way to decrease the discount
  • Open ending
  • Takeover
  • Liquidation: again an excellent way to get away of the discount; after this the investors can decide themselves where they want to invest in
  • Managed distribution policy

Another issue is that there seems to be an "obsession" with Warren Buffett and Berkshire Hathaway. Rather surprisingly, since Berkshire Hathaway is a US based fund (and thus accounted in USD, a currency that has performed very strongly relative to all currencies including the RM), investing a lot of money in non-listed companies, and only being interested in large acquisitions while iCapital is focused on Malaysian listed companies (which might include small caps, given its small size).

In other words, if there was ever a comparison between apples and oranges, this would be it.

Another rather interesting issue is that Warren Buffett and Charlie Munger each only charge USD 100K per year in wages, versus USD 1.5 Million (RM 6.4 Million) charged by the fund manager of iCapital, despite Berkshire Hathaway having a market cap of more than a thousand times the market cap of iCapital.

I have no idea where iCapital got these charts from, but they must be completely wrong. One of the best investors in the world has an annual compound return on its NAV of -0.39% over the last ten years?

The reality is very different according to the last year report, despite its huge size it actually was able to book very decent increases in its book value:

Another matter is that Berkshire Hathaway announced the following:

In other words, it might be better to look at the market value of Berkshires shares instead of the (understated, conservative) NAV.

[1] What iCapital should have done (instead of focus on Berkshire Hathaway) is give a clear and correct (that is based on dividends reinvested, it is not giving those at the moment) comparison of iCapitals performance versus similar funds, like the Malaysian ETF or Malaysian equity based unit trusts of reputable fund managers over the last 10, 5, 3 and 1 year periods. That would be comparing apples with apples.

[2] Next to that it should have openly discussed the persistent discount to its NAV, and why it has not taken any of the six measures as described in its IPO brochure. Those measures were listed there for a good reason, to assure potential investors that if there is a persistent discount, then there are measures (and implicitly: those measures will be taken).

[3] And lastly, it should have openly discussed the expenses and fees, which have been simply too rich in the last years given the high cash levels.

I used to have a lot of sympathy for iCapital and its founder Tan Teng Boo, they have been good for Bursa in areas of educating Malaysian investors. But that sympathy is decreasing each year, at least with me.


  1. In Letter to Share Owners, the Chairman said "I will continue the efforts of my predecessor, YM Tunku Tan Sri Dato’ Seri Ahmad Bin Tunku Yahaya, to ensure that our Fund continues to outperform and consistently deliver a decent return for its share owners regardless of the uncertain market and economic conditions."

    1. How a Chairman ensure that the fund continues to outperform when he is not the fund manager?

    2. How to consistently deliver a decent return for its share owners REGARDLESS of the uncertain market and economic conditions? Then why the fund's cumulative return dropped from 211.48% end-2013 to 189.75% as of 8 July 2015?

    In the performance review, "by now, the PE ratio for the S&P 500 is around 21 times, a level so high that even the patriotic American, Warren Buffett, cannot
    find any bargains"

    True? Isn't Berkshire Hathaway acquiring Precision Castparts?

  2. Thanks for your comments, all true.

    Berkshire Hathaway is a very different animal, also using the free float of their (large) insurance business. WB does often have a lot of cash (tens of billions of USD), but it is not hurting his performance. What is hurting his performance is the huge size of BH, limiting the stocks in which he can accumulate a meaning full stake.

  3. TTB is really a thick face by comparing him to Buffett, comparing Icap to Berkshire

  4. in fact, holding too much of cash is just telling he is speculating the bottom of the market which Buffett and Munger never ever tried to do so, they just avoid overvalued stocks.

    Also another closed end fund Guru Walter Schloss keeps his money invested 100% all the time no matter bear or bull

  5. I agree, that is a valid point. Let the investors bother about putting more money in (when the market is low), and less (when the market is high). Or just dollar cost averaging, constant amount per month or quarter.

  6. Is Icap keeping huge cash reserve to pay richly their own management fees?
    What moral obligation they still have in continuously using the shareholders' money but not giving dividend for their investment? Instead they use the money to pay astronomical management fees to themselves!

  7. Icap not just paid huge management fees to fund manager, n Teng boo also use the occasion of Icap AGM to promote himself at the expense of ICAP shareholders. Just have a look at AGM expenses.