Friday 16 September 2016

iCapital: "Ostrich policy" will not solve the issues (4)

City of London has sent the following letter to the Board of Directors of iCapital:

Clients of City of London Investment Management Limited (CLIM) own 21,970,900 ICAP shares (15.7%). There has been no action in response to any of the points that were raised in our letter to you dated 26th August 2015, which set out our concerns regarding ICAP's poor performance and persistently wide discount to NAV.  CLIM therefore confirms that it intends to continue voting against the re-election of incumbent directors. Accordingly, CLIM intends to vote against the re-election of Madam Leong So Seh at ICAP's 12th AGM on Saturday, 24th September 2016.

·     Performance
We reiterate our call for performance comparisons in shareholder communications to be made on a total return basis, which is universally accepted in the investment industry as best practice.

The total return in the five years to end May 2016 for the FTSE Bursa Malaysia Index has been 23.1% cumulative (equivalent to 4.2% pa). In comparison ICAP's NAV return has been 13.0% cumulative (2.5% pa). The share price return over this period has been even worse due to discount widening, at 6.4% cumulative (1.3% pa). These performance figures have been sourced from Bloomberg.

The Chairman stated, in his letter to shareholders, dated 19th July 2016, that ICAP has 'performed beyond expectations'.  We wish to make clear that ICAP's performance over the past five years has fallen significantly short of our own expectations.

·     Cash Management
We note the continued extraordinarily high cash level, which has persisted at over 50% for 3 years and on which shareholders have been paying fees for fund management and investment research services. Cash at each calendar year end since ICAP was launched (31 December 2005 to 31 December 2015) has averaged 39%. ICAP is clearly operating with surplus cash which, in our opinion should be returned to shareholders.

·     Expense Ratio
ICAP's expense ratio in 2016 was 1.9% (2015: 1.9%) which compares unfavourably with other country specific closed-end funds. The most significant item is the aggregate 1.5% incurred for fund management and investment research. CLIM urges the Board to negotiate competitive fees in order to reduce the expense ratio to an acceptable level.

·     Discount Control
ICAP's prospectus dated 26 September 2005 explained clearly that the return for closed-end fund investors is a product of NAV performance and the discount movement. The Chairman's letter to Shareholders in the 2016 Annual Report refers to a 4% rise in ICAP's NAV for the 12 months ended 31 May 2016. However it does not mention that the share price actually declined over this period, because the discount widened. The discount averaged 22% in 2016 versus 20% in 2015 (source: Bloomberg). Neither the level nor the trend is acceptable and CLIM is disappointed that the Board has again failed to take any action to address this problem.

CLIM notes from the 2016 Annual Report the Board's deliberations on 27th July 2015 regarding share buy-backs and the accompanying statement that the "Fund's NAV could deteriorate if it uses its available fund to purchase own shares". Repurchasing shares at a discount to NAV will actually increase the NAV per share and in CLIM's opinion this would be a sensible use of ICAP's cash, particularly in view of the Manager's apparent shortage of investment ideas.

ICAP's prospectus included a section (6.7, page 64) on managing discounts, noting that the options available include 'share repurchase, open-ending, takeover, liquidation'. CLIM urges the Board to consider all these options and to formulate a strategy to reduce the discount from its present unacceptable level.

MSWG announced it will raise certain issues at iCapital's AGM, for instance regarding the "other expenses" and the impairment loss. I hope they also support the above issues as described by City of London.


  1. Cordon off the shareholders cash ,so call closed end fund,then yearly withdraw for own expense use treat like ATM machine..on one hand advocate value investment,on the other hand waiting for market crash to time the market???

  2. Maybe I'm missing something, but if the numbers are correct and they trade at 25% discount, can't a big player buy them back to close the fund and get back the nav? It did happened on some credit funds in the US I believe.

  3. Hi, correct, but it will take quite some time because you dont want to drive up the share price, that would defeat the purpose.

    There was before another Closed End Fund on Bursa (Amanah Millenium Fund, if I remember correctly), it performed poorly and shareholders voted to discontinue it, enabling all to receive the NAV. Some foreign fund helped getting things done, I think.

    1. The one who proposed to wind down the Amanah Millenium Fund and helped to close the gap was Laxey Partner who sold their stake in icap to CLIM after Laxey Partner failed attempt to suggest icap to do share buy back

    2. Thanks! I was actually a shareholder of them, and went to the last two AGMs. I had a good impression of it all, they simply admitted the fund had underperformed. From what I remembered almost 100% voted in favor of discontinuing the fund. Chairman later became the MB of Selangor.

  4. hi how do i let the London fund vote using my proxy

  5. Hi, not sure. But you can vote by post, just fill in the way you want to vote and send it to the company on time. The chairman has to vote according to your wishes. So he might vote both in favour (for a certain amount of shares) and against a proposal (for another amount of shares), based on the instructions that he received.

  6. High time to liquidate this fund as too big a discount to NAV while fund manager is sleeping on his job With big pay cheque. I suggest biggest shareholder London fund should form a watts app chatting group among shareholders to garnish support for such move. May be it is a bit late this year but I saw London Fund is fighting a long battle war.

  7. Perhaps investors in iCap should follow the advice given in James Hay's recent BFM interview and attend the upcoming AGM and voice their concerns!