Sunday, October 9, 2016

I am alive but still in hibernation

At first I thought I will only start to update my blog when the bear market is here. The logic was to save myself from the anguish of being screw by people for publishing bearish views. During this period of inactivity I spend a lot of time exercising. Yea, I have not dived into swimming pool for a long time and now I am doing that a lot. Whenever I feel like it, I will sink myself in a sofa watching movies or drama. Doing light reading here and there on investment/non-investment related stuffs. At times going to my favorite hawker stalls all over the place. Being able to stay away from financial markets was really great.

Anyway, today I want to share with you on a financial topic.

Recently I came across frustrated shareholder comments in the websphere regarding iCapital. The price started to surge after the AGM...perhaps after the "education" session, many feel compel to buy as a "long term" investment again. Will it last or it's a trap?

There are several investment thoughts out there:

1. iCapital is full of cash now. A market crash will be handy to deploy cash.

When I plotted iCapital Cash as % of NAV vs KLCI, I can see the fund manager has 2 different of thoughts at 2 different cycles. Pre-financial crisis and Post-financial crisis.

Let's look at the pre-financial crisis. You can see KLCI continued to surge and iCapital cash level continued to dwindle in the same direction to the lowest of slightly above 10%. Post financial crisis, as KLCI zoomed ahead and iCapital cash level continued to rise and reached the high level of almost 70% by keep selling their holdings. The fund manager might get angry that if I said that he did not foresee the severity of the last financial crisis and whether next market crisis is a shallow or a very catastrophic one will remain unknown.

We can see that iCapital NAV slide pretty serious during financial crisis and then recovered in tandem with KLCI. The positive point is iCapital outperformed KLCI during recovery period.

Two points that I will leave you to think about if you are thinking to buy aggressively after feeling fired up.

1. When a bear market is here - iCapital NAV will drop also. If there is a serious bear market as iCapital anticipated that KLCI can break below 1,500 or even 1,000 within next 12 - 24 months. If this scenario comes true, let's say the remaining of 30% of holding can decline by 30 - 40%, NAV will drop to about RM 2.8 to RM 2.75 per share. A 20% discount to NAV will force the share to retreat to RM 2.20 level. Long term investors: BEWARE. Don't be a long term investor, be a value investor. RM 2.20 and below for next 2 - 3 years will be about the right accumulation price point.

2. Opportunity cost. iCapital as a disciplined fund manager will take time to deploy cash and also need time for the underlying securities to be recognized by the market. The time can take up to  2 - 3 years after the market capitulated. The whole cycle of market top to fully invested will take up to 5 years. Will many have that kind of patient?

Depressed share price discount to NAV Conspiracy Theory

When the share price of iCapital stagnant for a number of years, some of the investors begin to feel frustrated with the fund manager. What is not helping is City of London begin to accumulate iCapital share. The accumulation was substantial over a period of 5- 6 years with about 16% holdings. The fund manager did not saying very clearly  but if you read in between the lines, iCapital fund manager was implying COL purposely ran bad publicity through media and chat room trying to depress the share price with an objective of accumulating the share at low price. The discount may narrow if they have achieved their objective of accumulation..when they stop buying share price will go up.

My views:

1. Discounts to NAV is normal. If you take a look at the top emerging markets Closed End Funds listed in USA. 10 - 15% discount under Emerging Market funds is not something we should be too alarmed even they pay dividend.

2. iCapital NAV has been moving sideway for a number of years in tandem with the fund manager strategy to raise cash. The share price also more or less mirror that movement. It will continue to do so until iCapital starts to deploy cash to buy stocks and NAV starts to move upward, I think the sentiment may continue to be dampened for a while.

Theory of COL shareholder activism to close down the fund

iCapital has huge supporters and also a number of substantial shareholders have been holding to their shares for a long time.

For example, YM Tunku Tan Sri Dato’ Seri Ahmad Bin Tunku Yahaya/Tunku Sara Binti Tunku Ahmad Yahaya have been the shareholders for about 11 years, since inception of iCapital.

Some other substantial shareholders names like Leow Kok Meow & Sons Sendirian Berhad, Lam Fook Shin, Yeoh Ah Tu, Ocuvas Sdn. Bhd, Lee Siew Lin, etc.have been there for a number of years as well.

If there is any proxy fight, these group of core holders plus some other minority shareholders who are die hard fans of iCapital will easily defeat COL.

So, the probability of COL initiation to close down the fund will be low. Those want to buy and going for a quick flip will be disappointed.