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#Comment* icapital.biz investors should question no-dividend policy

KUALA LUMPUR (Nov 8): Tan Teng Boo — who was once compared to billionaire investor Warren Buffett as fund manager — is up in arms over the attempt by activist investor Andrew Pegge to enter the board of icapital.biz Bhd.

Tan's Capital Dynamics Asset Management Sdn Bhd is the manager of and investment advisor to icapital.biz — a closed-end fund.

In the run-up to a shareholders' meeting this Saturday (Nov 10), Tan declared he was "super angry" with the "short-term mind-set" of Pegge, who co-founded hedge fund Laxey Partners Ltd.

Tan insists that the intended presence of Pegge and others aligned to him on the board of icapital.biz would threaten the continued success of the fund.

It would also ruin the ideals of the close-end fund which Tan helped floated in mid-Oct 2005 as a vessel to show investors that more money can be made through long-term investing rather than taking short-term bets on rumour, Tan said.

In short, Tan's ideal world has no place for a social gadfly out for a quickie.

Pegge, an unknown to journalists in Kuala Lumpur, made headlines in Singapore last year for his repeat attempts to remove billionaire banker Wee Cho Yaw from the board of United International Securities (UIS) Ltd. Wee's UOB banking group owned nearly 50% of UIS while Laxey, which had only 10%, reportedly argued that UIS should step-up efforts to generate returns and raise net asset value.

Similarly, Laxey Partners in March this year reportedly wanted shareholders of London's listed private equity firm 3i Group plc to vote on whether the company should just halt investment activities, sell its assets and return all capital to shareholders.

Pointing out that Laxey made the same request at UIS five times in five years, Tan told theedgeproperty.com he doubts Pegge would allow Capital Dynamics to continue with the long-term investment horizon. "We have a track record as good as investing in gold," Tan said, pointing out that icapital.biz's net asset value (NAV) grew an average of 18% a year the past seven years. "Our [share price's] discount to NAV is on a rising NAV."

As at Oct 31 this year, icapital.biz closed at RM2.30, being 0.78 times its NAV of RM2.96 the same day. On Nov 6, icapital.biz closed as high as RM2.56, its highest in about five years and near its all-time high of RM2.80 on January 8, 2008. That's more than double the low of RM1.16 that icapital.biz stock price slumped to in October 2008 in the wake of the global financial crisis.

In considering who to vote for this Saturday, shareholders should probably first ask themselves whether they are getting the returns they want by investing in icapital.biz.

Are they really happy with icapital.biz reporting profits on paper but not paying out any dividends?

Icapital.biz has never paid out any dividends the in past seven years, Bloomberg data showed. But Tan yesterday told theedgeproperty.com the fund would consider paying dividends if that is what shareholders want.

For now, to realise profits on paper, shareholders will have to sell their icapital.biz shares.

But if selling is the only way to realise returns, can icapital.biz still be viewed as a long-term investment?

Investors may also want to consider asking whether the management, advisory and professional fees that icapital.biz is paying out to Capital Dynamics every year is something they believe as acceptable relative to the profits the close-end fund is generating annually.

In the past seven financial periods through May 31, 2012, icapital.biz has paid out a total of RM26.54 million in fund management and investment advisory fee to Capital Dynamics, its annual reports showed. This amount is about 10% of the growth in NAV since listing and 21.7% the profits generated the past seven years.

While individually, the management and advisory fees at any particular year only constitute either 1% or 2% of the fund's NAV, a quick compilation by theedgemalaysia.com found the amount to be 11% to 56% of its earnings in a particular fiscal year.

For example, in FY2009 these management and advisory fees came up to RM3.5 million or 56% of the RM6.3 million profits made in the same year.

For the year ended May 31, 2012, these fees amounted to RM5.79 million or 37% of the RM15.7 million profits attributed to shareholders — although this was only 1% of NAV.

To be sure, the fee structure for Capital Dynamic is transparent — just like any other managed funds, such as real estate investment trusts (REITs).

Thanks to growing shareholder activism in Asia, questions are already being asked on whether changes should be made to fee structures for REIT managers.

Ultimately, while this Saturday's icapital.biz AGM is to determine who gets boardroom clout, investors will have only themselves to blame if they do not ask the right questions to serve their own interest.

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