Blog Capsule 5: Bought ICAP @ $1.22-$1.23

Not the best price.

ICAP actually closed lower at $1.20, after touching a low $1.18 intra-day. :-(

Nevertheless, was extremely relieved this morning, since just saw US markets closed hugely positive , with the Dow posting +10.88% overnight gain, S&P500 posting +10.8% overnight gain and Nasdaq posting +9.53% overnight gain. I had expected US markets to be green this morning, but never expected it this strong. *phew*

Why yesterday, why ICAP?

To be honest, good luck probably played a bigger part than I would have liked to admit.

Most of you will know that I will be away for nearly 2 weeks on a holiday starting this weekend.

I am especially sensitive on this absence because as I have stated this before in the chatbox, even though I was not yet buying for investing since my outlook was still long-term bearish (e.g. see here - http://fusioninvestor.blogspot.com/2008/10/huaan-some-rumblings.html), one of the risks in staying in cash for too long is that when the markets rise, history has taught us that they tend to rise very fast. Worse, sometimes, we don't catch the upswing timely enough. Such points was also repeated by "V" in this article here - http://fusioninvestor.blogspot.com/2008/10/dont-dig-bigger-hole-2.html.

So, even though I have stayed largely in cash (except the small intra-day trades recently and also the occasional contra and short term-trades), I've also been thinking about positioning my stocks since the KLCI have broken below 850 and nearly touching 800 yesterday. Make no mistake, the markets have become deeply oversold when it fell more than 30% in less than 3 months. Another technical reason to consider buying around the 800 level is that I have been advising the chatbox my technical expectation that the market will test 800 (and not 850) last week, when the KLCI was trading near 900 last week and others were predicting 850 to be breached. The strong recovery intra-day yesterday after hitting a low of 801 prompted me to take position, and also prompted me to take profits in one other stock (TENAGA).

Furthermore, there is the saying "Sell in May, buy back in November", and we are now near the start of November. In a sense, the timing of my holidays is poor because it coincides with this November period where stock markets traditionally rise. Even though I personally attach less weight to this saying, at the back of my mind, the idea stuck. So, it's a matter of buying something during this timely period, certainly before the end of this week.

So, amongst the stocks that I thought might be good ideas to hold during this 2-3 week period would be ICAP. Actually, the attraction of ICAP is that it is "managed", as opposed to buying a stock like TENAGA (where it is not managed). Also, blogger "turtle" recently indicated in his blog that he purchased ICAP at $1.49 recently. Fellow blogger bullbear of course is a staunch supporter of ICAP, when the price fell from its peak of $2.81, down to $1.7x before his sabatical last couple of months. Fellow blogger Moolah is of course instrumental in alerting me the inconsistent behaviour of ICAP fund manager earlier this year. Of course, ICAP is a stock that I have invested before, as well as a stock that is followed by the chatbox from time to time. To me, ICAP is a stock to buy when the price becomes compellingly low. The only problem is when to buy, because what appears cheap almost always become cheaper during bear markets, if not next week, then, next month or next few months.

Ok, but why ICAP?

The "cheapness" struck me quite strongly yesterday. According to its latest weekly NAV report, on 23 Oct, ICAP NAV was $1.54. At the time when I saw the price, it had touched a low of $1.18, and $1.22 and $1.23 were available for sale.

I did some quick maths in my head. On 23 Oct, the KLCI closed 891.3. At the time when I bought it, the KLCI has recovered off its low of 801, and was around 820-825 iirc. A quick estimate suggests that I don't expect its latest NAV to drop below $1.42 since 23 Oct, by simple pro-ratio.

So, $1.22-$1.23 is equivalent to nearly 14%-15% discount from NAV. Historically, ICAP trades at a premium, and occasionally at a discount (say 3%), although I have never seen such a large discount before. Hence, it was very tempting strategically, and the only issue is always a tactical one, i.e. when to buy.

At the time, I felt this seems enough safety margin (even though what is cheap can get cheaper), hence, I took everything that Mr Market had to offer at $1.22 and $1.23 then, and left it there since this is a long-term investment.

This morning, I took a closer look, and realized that ICAP have approximately $57 million in cash as at 31/8/08, which translates to approximately 41 sen. So, its NAV of $1.54 on 23/10/08 comprised of say $0.41 cash and $1.13 equities. I expect this equity portion to fall since 23/10/08, and not the entire NAV. A revised estimate suggest that the NAV could well be higher than $1.42, say $1.46. A prudent estimate of the revised NAV may be say $1.40 to $1.45 say. In other words, the discount should still be around 15% say, when I bought at $1.22-$1.23.

I should sound a cautionary statement that buying on a discount is not necessarily always wise. Why? Simply because the discount can dissappear eventually if markets keep heading lower. However, if one manage to buy at close to the bottom and at a discount, then, this is ideal, because if the bottom is indeed reached and if it does bounce back up, then, this discount is a wonderful buffer and price to buy. So, whilst I'm generally to buy stocks at discounted prices (than at a premium), I would very much prefer to buy when the price has reached bottom, and is on its way up.

So, has the price reached bottom yet? No one knows for sure. Technically, it is still a long-term bear from the charts, although charts only shows the past clearly and the future is still uncertain. Fundamentally, the outlook is still bearish, even though in bear markets, we will have bear market rallies which can sometimes be quite strong and fast on the upside during these volatile periods - fortunes change hands very quickly too. My buy at $1.22-$1.23 is not the entire long term strategic position, but just say 1/5th of what I intended to accumulate by the time this bear market is over, which may well last until mid to end of next year (I could be wrong here very easily). So, think of this as just the first out of a few possible long term instalments, although I reserve the right to trade without informing anyone until after-the-fact.

Should long term investors buy now?

Again, traders should always follow their own timing rules, but what about investors? Well, at 800, the KLCI appears "cheap", although, as I have mentioned here and elsewhere many times, what we mustn't forget at the back of our minds is that what appears fundamentally cheap can always become cheaper later if/when markets eventually become more depressed.

So, since long term investors generally don't try to time the markets, a program of slowly accumulating at successively low prices would make sense. As I indicated above, I have spent 1/5th of what I intend to accumulate yesterday on ICAP. It is a bit bigger than what I would have liked for a long term investment, so, I may take some profits later if Mr Market is too bullish for my liking.

Has this changed my views of Mr Tan the fund manager?

No. I still think his track record and past results as a fund manager is still good, even in this current bear market. For example, when he started ICAP at end 2005, KLCI was above 900 and despite the market now being at least a good 10% below today, the NAV has grown from $1 to $1.4x. In other words, even though market is say 10% below, the NAV has grown at least 40%, suggesting an outperformance of at least 50% during the last 3 years. This would certainly beat - as a rough guess - 90%-99% of professionally managed monies in my humble opinion, so, there is no doubt in my mind that Mr Tan Teng Boo certainly has a superior investment track record. His integrity on the other hand remains the same to me, whether I own ICAP or not. As always, it is critical to always apply one's own independent and critical mind and not blindly believing in what anyone says, otherwise, you just simply expose yourself to possible manipulation by others.

Disclaimer: At the time of writing this, I now own ICAP. Do be aware that I can dispose ICAP at any time in future, without telling you so.

ICAP vs icapital: Fund Manager vs Advisory Service Provider

As you may be aware, fellow blogger, Moolah, has been blogging on ICAP and icapital for some time.

For clarity, ICAP refers to the Fund which is listed in Bursa.

Whereas icapital refers to the subscription based / paid investment advisory service which is available in print form or via Internet - http://icapital.biz/english/).

The two are not the same thing, even though they are related, since ICAP fund is managed by Mr Tan Teng Boo, who is also the Managing Director of icapital.

...

In my opinion, Moolah's two latest postings are very good, extremely thought provoking, and are worth reading:

- http://whereiszemoola.blogspot.com/2008/08/more-on-icapital-transparent-issue.html

- http://whereiszemoola.blogspot.com/2008/08/icapital-how-independent-is-advice-when.html

The reason is because it highlighted very clearly a potential conflict of interest issue.

This has important implications for investors who subscribed to icapital's services for a fee.

...

In this article, I wish to highlight just one situation where this conflict of interest has arisen.

The situation is when ICAP owned the same stock that icapital has a specific Buy (or Buy/Hold) recommendation on.

The question is - if ICAP owned the stock, and icapital called the same stock a Buy, is this stock worth buying?

Superficially, one would think so isn't it?

After all, ICAP owned the stock.

And at the same time, icapital also called a Buy.

Isn't that's consistency?

...

However, recent events has shown that this might not be the wisest thing to do.

Why?

Because as Moolah has shown in both his articles - earlier this year, ICAP has been selling stocks that they previously owned - like Boustead, Integrax, LionDiv, Poh Kong, etc. - even though the Advisory Service still has a Buy/Hold Call on them.

Huh?

Macam ini pun boleh?

Why didn't the Advisory Service change their call to Sell?

...

In fact, you may even have already asked this related question.

Which should happen first? Should ICAP "sell" first, then, "call" a Sell?

Or should icapital do the reverse? I.e. Call Sell first, then, ICAP sells?

(Perhaps some of you thinks that ICAP and icapital can do both at the same time? But is this possible? Chances are if they try to do both at the same time, the result will be ICAP sell first, and icapital advise later ... )

So, what should it be? Sell first / call later? or Call first / sell later?

...

Notwitstanding this question, another question to ponder is are there any laws that says that this is wrong?

Or is this action - Sell a stock, when Advisory Service says Buy - is simply not wrong?

Well, this situation is not exactly new.

It has happened many, many times in the past.

It has also happened many, many times not just for ICAP/icapital, but at many other places.

And not just in Malaysia, but also in many markets around the world.

In fact, many brokers who manage monies on behalf of their clients (e.g. OSK, etc.) also provides investment advisory services.

And many, many times, the broker side will Sell the stock, when, the advisory side says Buy. And vice versa.

Is there anything wrong with this? If you accept it is wrong, what actions should be taken and done? By whom? When?

...

So, coming back to icapital - in the past, icapital claimed and explained more than once, that their advise is actually for a different purpose and a different time-horizon. For example, if I'm not mistaken in my recollection, they claimed their advise is fundamental based intended for value investors (where lower prices usually represents better value) who intends to own stocks for a long-term (where price falls are usually a friend than an enemy).

Whereas, the ICAP fund works differently. The purpose of the ICAP fund is maximize shareholder value, i.e. if the Manager thinks prices will fall, then, they will sell, since trading potentially enhances the Fund returns if done properly. In other words, ICAP fund should not claim to be value investors who intends to own stocks for the long-term ...

But unfortunately, ICAP Annual Report didn't say this. If you look at the Chairman's Letter (page 1) dated 11 June 2008 in the Annual Report, he said this "Your Fund is a value investor, and hopefully its owners are as well." And this ... "As I explained in last year’s report, I have constantly referred all of you as share owners and not shareholders. Holding implies something transitory while owning implies a more permanent state of affairs."

Hmmnn ... so, how does one reconcile these 4 things - (a) what ICAP Chairman says, (b) ICAP's Selling, (c) icapital's Buy Call and (d) icapital's explanations to justify its buy call?

And let's not forget our entire industry practices too, as well as global practices ...

...

Can we rely on our regulator to fix this apparent anomaly up?

For example, has icapital crossed the line that allows regulator to take action?

And what about icapital subscribers - have they suffered losses holding on to their stocks because icapital continued to call them a Buy/Hold?

They paid good money for the services.

Should all of these subscribers be made aware of this apparently anomalous action - that when icapital calls a Buy, the ICAP fund can also be actually Selling the same stock at the same time?

Should regulators insist on this "Disclosure"?

Would the public accept such Disclosure?

Or whould they think it is "too confusing"?

If the public thinks it's "too confusing", is this a bad thing?

Can such an anomaly ever be fully resolved by our regulators alone?

...

Or do we have to simply accept that "Buyer's Beware"?

I.e. the "onus" is on the "newbies" to smarten up themselves through hard and expensive lessons and tuition fees to Mr Market, without additional disclosure?

...

To me, the regulator and the industry should take the lead to resolve this apparently contradictory action.

It is obvious that this is an industry policy issue.

Or a policy neglect issue?

...

Despite what has happened, even today, here are still some investors - especially new investors - who are probably unaware of this apparent anomaly.

The "reasonable expectation" is still consistency in Sell Action = Sell Call.

Not a contradictory Sell Action <> Buy Call at the same time.

Especially when the Advisory Service charges a fee for it.

...

And until the regulator & industry takes positive steps to resolve this, all we can do is to be aware ourselves of this practice.

And to keep repeating and spreading this message around.

And hopefully, noone will say that this industry is full of unethical people, who are always trying to legally steal your money when you least expect it.

That would give our industry a poor reputation.

And that would be bad for business.

Unit Trusts: Quick Commentary

Disclaimer: I am not a licensed financial advisor. If you require professional financial advise, please consult your licensed financial advisor. Please treat my comments below as merely sharing personal thoughts and second opinions.

Dedication: This article is dedication to "EH", "pk" and others who have expressed interests in investing in Unit Trusts before in real life, as well as in my chatbox. For some of you, sorry if this opinion is "belated".

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Recently, I met up with a young friend of mine whom I haven't seen in months, and we chat about Unit Trusts over a meal at my house. We chatted about many things, learnt that he was recently promoted, been very busy naturally, and the promotion came with a higher salary which I am pleased for him. Naturally, after some time, he's wondering what to do / how to invest his surplus monthly funds.

His background is that he is an intelligent, full-time professional, working outside the financial sector with little financial knowledge, and so, have little knowledge on personal financial products. He also has very little time to monitor financial markets, and prefer to spend whatever little extra time he has left outside his job to enhance his small side business over the next few years.

His benchmark comparison is obviously Fixed Deposits. These are safe and secure, and doesn't require any involvement from him. But the returns are a measly 3.7% to 4% per annum, which doesn't even match inflation. These are of course very natural concerns, since even the official inflation rate is already 7.7%+, and the unofficial rates even higher.

The extra savings per month is also not large. We may be talking say hypothetically $5k per quarter (figure adjusted), but he's also considering his existing savings which I understand is currently in F.D., and when spread over a monthly basis, may double that (say) over the next 6 to 12 months.

My friend is of course aware that with shares and unit trusts, prices do fluctuate, and past returns do not guarantee future performance. In terms of trading knowledge, he has virtually zero, and is not yet interested nor ready to learn how to trade yet. In terms of time-frame, his time-frame is very long, since he doesn't expect to have any need for that surplus funds, and so, does not expect to touch the funds over the next 10 years.

The short of it is that he asked for my opinion on what I personally think of Public Mutual equity trusts. Basically, several people has recommended him Public Mutual trusts, and he's wondering how that compared with investing directly in Public Bank shares, which he has heard others including me mentioned before also.

My thoughts which I shared with him was as follows.

1. Unit Trusts are generally long term investments because of the higher upfront fee. Typically, equity unit trusts charge 5% or more as upfront fee, and so, it makes it hard to beat F.D. if the time-frame is short. Shares on the other hand have lower brokerage, typically, 1.5% or less for the full buy and sell trip. For him, it is important to adopt a long-term view for both Unit Trust and Shares which to him is already something he is willing to do before we met.

2. Equity unit trusts and Public Bank shares both share the same characteristics, in that they are both share investment and so, their prices can fluctuate over time. It is both a source of profit or an opportunity to lose money. But in general, if one adopts a prudent approach to buying and selling, then, the price fluctuations are a friend than an enemy - it gives one an opportunity to "buy low" and "sell high". The potential returns can be significantly higher than F.D. if it is done prudently.

3. So, to maximize profits, contrary to public opinions, it is not a question of how long the money has been invested, but at what price was it bought and at what price was it sold (ignoring dividends). So, sometimes, two year old investment can be more profitable than a 10 year old investment, and sometimes not. The key is to be selective in when to buy (the Method), as well as how much to buy at any one time (Money Management). Adopting the attitude that a low price is a friend for long term buyers is also very important (the Mind), because often, we are our worst enemy when it comes to investing.

4. At the present moment, when he has a very long time horizon, I advised against entering the market now. I believe it is better to wait as a general comment. Why? Because we are still in a bear market where we can expect more lower "highs" and a lower "lows" to come.

I showed him various charts of various stock markets around the world over the past decade, where it was obvious that in many stockmarkets around the world (e.g. the US, London, Dax, Cac, Australia, Malaysia, Singapore, etc.), it was a wonderful bull run for many, many years (e.g. since 2002) - as witnessed from the higher "highs" and higher "lows".

However, this year, it was obvious that the bear has started to come in, as evidenced by the "lower highs" and "lower lows".

And given that the bear has only been around for less than a year, chances are good that it probably won't stop this month, and reverse its course, after 5 to 6 years of bull run. This is a longer-term bear that has come in, and I believe it will take longer than just a few months to run itsfull course.

What to Buy?

We went back to his original question of what to buy. Public Mutual trust or PBBANK shares?

I note that the problem with investing relatively small amounts of money is the lack of diversification risk. Public Mutual Equity trust has the advantage of diversification, in that the Manager invests in a number of shares which are supposed to be "carefully selected". So, if for whatever reason any one share kaputs, it shouldn't hurt the entire fund performance. Whereas, investing in just PBBANK alone is potentially risky. We chatted about PBBANK - the good and the bad - and about the reliance of valuation on the founder (THP), and the risks should something unexpected happen to him. Whilst PBBANK is clearly the best performing bank relative to other banks in Malaysia over the past long term, my advice was to only put a certain % of funds in there, and not 100% of funds.

As for Public Mutual Equity trusts, I compared this with ICAP. Notwithstanding my stance on ICAP's integrity, I do believe that ICAP as a fund manager has performed excellently - the past results speak for themselves. I suggested that he considers investing a part of his savings into ICAP also, since it automatically provides diversification, as well as fund management (including trading) services for a relatively small level of expenses, and for a significantly lower fee with better performance than Public Mutual equity trusts.

ICAP vs PBBANK vs KLCI Performance

The green line is ICAP.

The red line is PBBANK.

The yellow line is KLCI.

All 3 are compared over the same time period, which is from Oct 19, 2005 (or 2.75 years), when ICAP was first introduced to Bursa.

We can see that ICAP has performed very, very well amongst the three vehicles. ICAP total returns over the 2.75 year period is nearly 80% or around 23% annual compounding rate of return. This is a superb result.

PBBANK is also very, very good - nearly 60% over 2.75 years, or around 19% annual compounding rate of return excluding dividends. And if include dividends, the returns should be comparable to ICAP.

The KLCI however is a relatively poor performer - it only managed 27% over 2.75 years, or around 9% annual compound rate of return. Whilst this is very good compared to Fixed Deposits, we must bear in mind that the last 2.75 years was an extremely good year for Bursa, and I don't expect this same level of performance to be repeated over the next 2.75 years. In fact, it will definitely struggle to even earn double the F.D. rate annually (7.4% to 8% p.a.), over the next 3 years.

And we observe that ICAP (and to a lesser extent PBBANK) has large volatility too. For example, if one has invested $10,000 at the start, then, this amount would have grown to nearly $28,000 at its peak, but then, fall to $18,000 approximately. This means one must be willing to give up $10,000 as a Buy and Hold investor. But for someone who is very busy with 2 careers, and does not have an interest in monitoring their investments, this is an unavoidable cost. We can't have everything in life.

Public Mutual Performance



Public Mutual Equity Fund also outperformed KLCI. However, it only managed 46% over the same 2.75 year period. This translates to less than 15% per annum return, over what is arguably one of the best 2.75 year period in Bursa.

My belief is that this is the maximum that one can reasonably expect. In fact, after taking out charges and expenses, it will be less. Depending on time-frame, it could be 14% or 13% or less. I ass-u-me these are based on net prices, and not gross unit prices, i.e. the maximum possible returns. I expect actual returns to be less than shown in the graph above.

So, if we compare Public Mutual Equity trust over the same period with PBBANK shares and ICAP, it's clear that the latter 2 are better performers with lower fees. Of course, the past does not guarantee the future, but both vehicles seems to be better long term investment.

My Allocation thoughts between the 2 - perhaps consider something like 33%-50% PBBANK, 50%-67% ICAP. Or something similar.

My friend was also interested in investing in China funds and enquired about Public Mutual China funds. We compared some graphs and found that since inception, Public Mutual China funds have under-performed their benchmarks. In fact, on absolute return basis over the same period 2.75 years, the China funds have underperformed KLCI. It's obvious to me that Public Mutual expertise is in the local sharemarket, and when they venture to China, they do not appear to demonstate the same level of relative competency. I leave it up to him to decide whether he still wants to invest in China, but if he does, then, I advise him to keep it small. E.g. 10% China, 40% PBBANK, 50% ICAP or something like this. Note that since I am not a licensed advisor, I do not want to give him specific number, but leave that to his discretion.

The Method - When / How to Buy?

Using Public Bank as an example (and similar examples can be applied to ICAP), I showed him another price chart in my study, where PBBANK recent low was seen at $9.95 after falling from a peak of $12 on 12 May 2008.

The goal then is simple. Just patiently wait until PBBANK share price falls below $9.95. When this happens, wait until the price falls to find bottom. E.g. wait until it falls to say lower third or lower quarter or even lower over the past 52 weeks. Only then, consider making the first out of many purchases.

In other words, do nothing until the price makes a new lower low. We can't catch bottoms, but I believe the odds are very good that one will be able to buy lower than $9.95 sometime this year. Patience is the key.

Money Management - How Much to buy & sell

In the near term, the question of selling does not arise, as he intends to be a very long term investor. It is only a question of how much to buy each time, since the savings is approximately monthly, aside from the initial investment.

I suggested that since he doesn't have experience in timing the market, and market timing is difficult even for experienced investor, he is better off spreading the buys from his initial lump sum too say over 6 to 12 months, in the same timing as his monthly savings.

So, for the immediate term, buy when the price first make a new low. Let's say this happen in October at say $9.50. Then, when November comes, take a look at the price and if it's below say $9, then, buy as planned, but if it's $10, then, just wait and carry that over to the next month or until a lower price than $9.50 is seen. However, PBBANK is a generally well supported stock, so, any knee-jerk fall is likely to only be short-lived for a few days in general ...

Of course, there is a risk that the price might never fall below $9.50, but in the current bear market, the odds are hugely stacked against it - buying opportunities at lower prices are more likely to occur than not occur. And in the process of waiting, if he finds himself with too much cash, then, just use a % of that to buy at a lowish price- e.g. use 20% or 25% to buy at the low of the week or something like that, and keep the rest in cash. And since he expects to be a monthly saver over the next 10 years (he has separate emergency funds and access to his parents as well), he can afford not to hold more than 3, 6 or even 12 months savings in cash. I advise him to review from time to time his financial circumstances, since he may one day get married, have a family, have a mortgage, etc., with additional financial commitments, even though at present this is not an issue under consideration.

The Mind - Dealing with Volatile Prices, Fear, Greed, etc.

We can't cover everything, but some advice are ... for PBBANK and ICAP only, treat lower prices as a friend, since he is a long term investor. Low prices are usually opportunities to buy on the cheap.

For example, let's say the founder of PBBANK passed away, and the share price drops by 30%. To me, that's knee jerk reaction, and is a great opportunity to buy. I would use 33% of my cash to buy for every 10% price drop, or something like that. It can be fine-tuned, but the general idea applies. Try to buy at low prices.

After you buy, there is no need to watch the price every day. Once a week is more than enough. Unless you have spare cash and looking to buy. Then you might want to monitor more regularly, say everyday for a week before purchasing. This will happen every month.

Watch brokerage. $5k per quarter is not a particularly large amount, although $3k per month is the bare minimum. After the first 6-12 months (including the initial investment), the future savings may / may not be large enough to warrant monthly purchases (assuming no further increase in savings). As a very general comment, one wants to purchase shares at around $3k minimum, to keep the brokerage small. This can be fine-tuned, as his future savings may be higher a year later.

Try not to pick tops to sell. I walked through with him some live examples, picking a random date in the past, and then walk through the day-by-day experience, and asked him to try to pick tops as we roll forward one day at a time. It is interesting that he couldn't pick tops at all from this exercise since he has no training. But it gave him a good "live" example of the volatility involved, the feeling of "euphoria" as price rise and the "fear" as price falls (after a while, when he is absorbed in the process, you can see his greed and fear). In his case, better to just ignore watching the stock market, except the few times when he wants to buy.

Discipline. Don't touch the monies once invested. Especially when prices are low. Don't invest more than agreed upon. Don't be greedy and over-invest. Stick to the plan even when times are good years down the road. (He might check up with me again after he decides to invest).

Take an interest in PBBANK and ICAP fundamentals. E.g. the Annual Reports, and the Quarterly Reports in Bursa. Over time, once he has bought, I expect him to automatically be interested in the 2 counters that he owns whether these are on the news, rumours, tips, etc.

Some Concluding Remarks

It is always difficult to give advice to beginning investors on how to invest to earn more than F.D. The risks are great that they could lose money. My advice remains which is to keep it in F.D., or give the money to a professional manager to invest.

The problem of course is that with high real inflation (not official figures), F.D. rates simply does not keep up with that. If we do nothing, it means our money erodes in purchasing power as a matter of default.

Public Mutual is one of the best unit trust managers in the country. They do decent job. The question in my friend's mind is can he do better?

In my own personal opinion, investing in PBBANK and ICAP in a "balanced" manner (say 33% to 50% PBBANK, 50% to 67% ICAP) in this specific example for my friend who has set monies aside for everything else that he can think of, and to only invest surplus funds that he doesn't expect to touch over the next 10 years or longer, seems like not a bad proposition. On paper, both beats Public Mutual trusts hands down (19%-23% vs 13%-15%) based on historical returns. Of course, the past does not guarantee the future.

The final decision is up to him. I do not receive any hard nor soft commissions from either PBBANK nor ICAP nor from my friend. He's a friend, it's just a chat between two friends, and I don't dream of receiving any money at all from him. If he didn't talk to me, his monies would be retained in either F.D., or cash or ... ?

Disclaimer 2: As usual, buy, hold, sell, at your own risks.

AMANMFB and ICAP news

An interesting recent news on AMANMFB with something about ICAP and closed-end funds in general after my May 15 posting. Here, I will selectively compare both with OSKVI. My highlighting and italic comments below.

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Amanah Millenia's defensive moves
Updated : 17-05-2007
Media : The Star
Story By : C.S. TAN via www.biznewsdb.com

PETALING JAYA: Closed-end fund Amanah Millenia Fund Bhd, which is facing a resolution for its liquidation, is offering a few carrots to its shareholders to vote against such a move.

Firstly, it has proposed a cash tender offer of up to 10% of the company twice a year. That would enable shareholders to sell their shares back to Amanah Millenia, and cash out completely over five years, if they wish to do so.

Secondly, it proposed to reduce its management fee to 0.75% a year from the existing 1.25% of the fund's net asset value. This represented a 40% reduction from the current fee, Amanah Millenia announced on Tuesday.

"These are measures to encourage shareholders to vote against the resolution, and allow them to stay in business,¨ a fund manager said. Amanah Millenia's articles of association state that on its 10th anniversary, which is this year, a resolution has to be tabled for shareholders to decide whether they want the fund to continue for another five years, or to discontinue, which is to liquidate.

The company, listed on the Bursa Malaysia main board, said that in its AGM next month, its board would propose the resolution, in accordance with its articles.

The writing on the wall is that some institutional shareholders that have taken up substantial stakes in the company, have a probable objective to close the fund. In this region, it is fairly common for institutional funds that have bought stocks of closed-end funds that are trading at a sharp discount to their net asset values (NAV) to vote for their liquidation.

In OSKVI's case, there is no similar buying by foreign institutional funds nor complete liquidation plans (as far as I know). Instead, OSK - the parent - has been steading acquiring OSKVI shares over the last 3 years. It's annual reports show the following percentages of shares owned by OSK:
- 31/12/2004 - 56.2%
- 31/12/2005 - 59.2%
- 31/12/2006 - 65.4% - quite a significant addition.

Since 31/12/2006, OSK continues to accumulate OSKVI shares 3 times with no disposals yet:
- 10 Jan 2007 - Buy 389,000 OSKVI shares at $2.66
- 28 Feb 2007 - Buy 408,000 OSKVI shares at $2.47
- 5 Mar 2007 - Buy 186,400 OSKVI shares at $2.28

The increasing %s does not necessarily mean that OSKVI intends to privatize the company. But it doesn't preclude the possibility of that happening, since it makes it easier, should a need arises to do so in future. Naturally, a company like OSKVI would represent great value to a private owner, who can buy $1 worth of business for far less than $1 (or say $0.65 as of last Friday), and the $1 is quite likely (almost certain??) to grow in future.

It is also interesting that the last 2 parent purchases happened on 28 Feb 2007, and 5 Mar 2007, both dates coincides with the period when OSKVI went on "sale" during the end February correction.

Laxey Partners Ltd, a fund management company registered on the Isle of Man, first declared its interest of a substantial stake of 5.05% in Amanah Millenia in March last year. That was when the share price was around 80 sen, a hefty 29% discount to its NAV of RM1.03.

Since then, Laxey has kept buying the stock until it became the second largest shareholder, with a stake of 16.2%.

Most closed-end funds trade at a discount to their NAVs because liquidating them would not result in the realisation of their NAVs, especially in funds that invest in thinly traded small-cap stocks. A sell-off of such stocks would cause their share prices to drop.

In the case of Amanah Millenia, which is mainly invested in big-cap stocks, any sell-off can be done easily. As such, a liquidation should lead to a conversion from shares into cash that is close to the NAV.

The discount in Amanah Millenia's shares has narrowed from a few months ago but it is still substantial. The stock closed at RM1.07 yesterday against its NAV of RM1.215 on May 11, a discount of over 13%.

That showed that Amanah Millenia's NAV has gained only 21.5% after 10 years. That is partly due to its launch just before the regional financial crisis broke out in 1997.

The only other listed closed-end fund, iCapital.Biz Bhd, is in contrast, traded at a slight premium to its NAV. The stock closed at RM1.64, just above its NAV of RM1.63 on May 9. There is a premium mainly because the fund has performed exceptionally well since its relatively recent launch.

It should be added that when the market values ICAP at a premium, it means there is expectation of outperformance in the future. Past outperformance does not guarantee future outperformance, but it does improve perception and the odds.

In OSKVI's case, I feel there is a good chance its NAV may increase faster than ICAP and AMANMFB over the next 2-3 years. I think if the market continues to under-value OSKVI persistently, either OSKVI is forced to realize its gains (at closer to market value than outdated book value) and distribute the cash to shareholders, or the parent might take the company private, both of which should be good for OSKVI shareholders.

Amanah Millenia said in its latest quarterly report it is not intended that the company should have a limited life,¨ but shareholders have the opportunity to review that this year, and at five-year intervals after that.

It is not known, however, how its largest shareholder, Permodalan Nasional Bhd (PNB), would vote at the AGM. It is surprising that PNB has steadily trimmed its stake instead of raising it to vote against the resolution to liquidate.

PNB's stake in Amanah Millenia stood at about 20% at the start of the year but this has gone down to 17.3% early this month.

The Employees Provident Fund (EPF) owned about 7.7% of the fund at the start of the year but had gradually sold down its share and ceased to be a substantial shareholder last month.


Disclaimer: I own OSKVI, ICAP and AMANMFB, and naturally, my view may be biased. At this moment, I do not intend to add any more OSKVI, unless Mr Market presents to me an even more compelling opportunity. I intend to use TA to supplement my trading decisions. Please use your own judgement and invest (buy, hold, sell) at your own risk. Please also read past disclaimers and postings for context.