@tantengbear This is the same kind of logic with low risk and high returns investment, against conventional wisdom. If there is such a thing and there is no barrier to entry, arbitrageurs can sell their high risk and low returns investment and switch to this low risk high return one, bringing things back to equilibrium on the risk/returns CAPM line.
The equivalent of a run on a bank is the rush for redemptions in an investment fund, if it is open ended. But for a CEF, there is no redemption as such, so the only exit is to dump shares through the market at whatever price available, which is what is happening to iCap's price discount. Stopping the only big buyer there is is going to make it worse. Directors buying a few lots here and there are not going to restore confidence. Quoting WB is one thing, doing the same as him is another. WB is paying himself only $100K a year, so he is on the same page as his investors.
5 days ago | Report Abuse
Anecdotal evidence would suggest that the injunction is the cause for the widening of the discount, ceteris paribus.
6 days ago | Report Abuse
ICap obtained an interim injunction against COL buying further shares on 21/12/21 with share price at 2.24 and NAV at 3.46 at end of December 2021, for a price/NAV of 0.65. At end of February this year, share price dropped to 1.98, with NAV slightly down at 3.43, for a price/NAV of 0.58. So without COL doing any thing, price discount widened another 7 percentage points. Got to find another bogey man then, don't you think?
What WB said on share buybacks this year https://www.ft.com/content/97b87555-3b1a-408d-90c4-21cb45afecb9
Looks like management fees are higher than investors' returns! Any statistics on AUM over the years? This is not a CEF, so investors can come in or leave any time, at the buy/sell spread.
Using your same logic, if COL can continue to buy after disposal of the court case, the price discount is going to get worse, you are then frightening the shareholders to sell their shares before price drop further. Who to blame then?
@Integrity how many shareholders can be lucky enough to have generous uncles like you? How many can afford to bail out and leave around $1.40 on the table through no fault of their own, but blame it on other shareholders who continue to sell at such deep discounts? The latter are the root cause. There is no short selling allowed on this stock, so all the sellers are genuine, not trying to depress the share price to make money.
@i3gambler, a dividend reinvestment plan is like a politician standing for re-election. If the voter don't want him to stay, vote him out, those who want him to stay on, vote for him. A confident fund manager would let the investors choose, as a vote of confidence and show of loyalty, one not too sure would not want to take the risk at all.
So whether paying dividends or doing share buy backs, there is no one-size fits all answer, all depends on the actual situations of the companies and the markets.
To explain the M&M Theory in simple terms so everyone can understand, if you own a hundred shares trading at $1, and you receive a 10 sen dividend, ex dividend, you would have received $10 in dividend, and your shares are now trading at $0.90 ex dividend, so worth $90 now, for an unchanged total value of $100. Alternatively, without the dividend, you can sell 10 shares at $1 each and receive $10 cash, and still have 90 shares at $1 each, exactly the same result as getting a dividend. Such simple logic.
I have posed this question before, if the company declares a $1 dividend with an option to reinvest that $1 into shares at market price, which would you choose? If the latter, this is equivalent to the company buying back its own shares, which is what you would be doing, by reinvesting.
If market cap is 10 billion and book value is just 1 billion, buying back 10% shares would cost $1 billion, doubling capacity also around $1 billion, but takes a while to build, which is the better option? Unless the objective is to become the most valuable stock on Bursa, overtaking Maybank?
Very basic mistake, if the shares are trading at more than 10x book value, investing just 1 tenth of it, the limit of sharebacks allowed, i.e. at book value, would have doubled the capacity of the firm in the long run, instead of just buying back 1 tenth of its earning capacity for the same amount.
Top Glove, the example often cited here against share buy back, was under the delusion that its profitability is sustainable into the future, so the shares were 'cheap'. Nothing to do with the merits or demerits of share buy backs per se.
This is basic corporate finance taught in business schools, the Nobel Prize winning M&M Theory of corporate finance and dividend. This is what WB is applying as prime example.
Financial theory says share buybacks and dividends are just either sides of the same coin, as both are returning cash to shareholders, the deciding factor being who can do better with the cash, the company or the shareholder? In WB's case, he don't want to pay dividends, but do share buy backs because he is confident that he can beat the average shareholder in the investment game. Any shareholder who needs the cash can sell the equivalent amount of shares in the market, because ex-dividend, the share price would adjust downwards by the same value as the amount of shares sold instead, so no difference either way.
I was in the market then, and he was my contemporary, a rather small community.
This involved the alleged manipulation of year end closing share price of an investee company in order to boost the value of the portfolio, on which the management fee is based on.
When people look at the numbers this way, how many will want to take cash? So the critics here will have a tough decision to make, haha.
There is no logical reason for the cash assets to also be subjected to a 40% discount. Give a dividend, but with a re-investment option at near market price. So those who want to take cash can cash out, those who want to stay on can remain and own more shares at big discount, a win win for both kinds of shareholders, and for the company, can end up with more loyalist shareowners, which is what they have been harping on all this while. Already suggested this before. This is how the numbers can look like: Using NAV of $3.41, market price of $1.98 and a dividend of $1. Price discount is now 42%, and theoretical ex-dividend price is $0.98 with NAV of $2.41, which is a price discount of 59%. So shareholders have a choice of taking the $1 cash, which is no longer discounted 42%, or buying more shares with the dividend cash at 59% discount. Every one should be happy?
For years, Tabung Haji was able to declare dividends for its investors by not making provisions for paper losses on its investment portfolio. That was stopped after Rafizi blew it open and the auditor general confirmed it, and the government had to take over the sick portfolio at book cost to give TH a clean balance sheet again. LTAT is also facing the same problem of having to mark to market its investments.
For LTAT, the Boustead offer is not made from the goodness of their heart. They have to carry the investments in Boustead at the marked to market value and not book value, which causes a big dent on their balance sheet. But if Boustead can be privatised and no longer listed, then it can be carried at book or NAV value, whichever is lower. So effectively, the discount to NAV is captured by going private. PNB did the same thing when they took AHP1 private as the shares were trading at a discount, which reduced PNB's ability to declare dividends for their units.
For accounting purpose, individual counters book P&L are aggregated and only the net amount needs to be reported if below cost and provision made, so if there is still a surplus, such individual losses can be hidden. But once the losses are realised, then it has to be reported in the P&L. So you can have an instance when the P&L can report a loss because income from interest and dividends are less than realised losses and management fees, but can still report an increase in NAV because of unrealised gains in portfolio. Even though Boustead GO is above current market price, if realised, will be a big loss on the P&L if the book cost is much higher.
@speakup, no way Edge will touch this company again. TTB had sued them for defamation in the past and won.
@thetruthseeker, the ex-Chairman resigned before the AGM that adopted the annual report including the reimbursement of the dual listed fund expenses incurred years earlier. BTW, the annual accounts are not subject to shareholders vote, so only need to be passed by the BOD.
When the previous chairman of the BOD resigned, the first announcement to Bursa on the 24/11/20 gave no reasons for doing so. In a subsequent amended announcement on the 1/12/20, for reasons, it was stated as "difference in opinion" However, in the next box, which is for "detailsof any disagreement that has with the BOD, it was filled as "No". Did he resign for something as trivial as not liking the color scheme for the office? No shareholder bothered to find out.
@the truthseeker, this bit about the Chairman of the board of MSWG clears up some questions in my mind. I have had dealings with MSWG in the past, so I better not make public comments. As to the director's recent share purchase, neither here nor there, too small to change him to wearing two hats instead of just one.
@thetruthseeker The company can just look up the share register changes every day to track who are the sellers and purchasers for the day directly, Getting the identity of the selling/buying brokers is useful only if you know who are the brokers for certain parties so that you know who are on the board at that moment and plan your orders. Parties who want to hide their identities can simply use a number of brokers and switch them randomly. If you have followed the Singapore penny stocks case, you will know how this is SOP.
Can you imagine the consequences if iCap succeeds in its claim that COL is in breach of the limit and forced the latter to turn sellers? The exact opposite effect of announcing a share buyback plan.
WB has told shareholders that Berkshire will consider share buybacks if price drops below 1.2 times its intrinsic value. Given the financial strength of the company and the reputation of WB, this forms an invisible support line to investors confidence.
A share buyback at a discount is effectively a transfer of wealth from the selling shareholders to the remaining shareholders, so this has a psychological impact on those intending to sell, why should they lose out on the price discount by selling? Better let others sell and
i reap the benefits by keeping the shares instead. This will slow down the supply of sellers and can help narrow the discount. In US, companies can announce big buybacks, but are under no obligation to buy in full, just for the psychological impact on the share price, because that imply a temporary floor price supporting the share, giving confidence to the buyers to come in, and for sellers to hold back.
Since July 17, 2018, WB has overseen the repurchase of more than $62 billion of Berkshire Hathaway Class A and B stock. That's far more than Buffett's company has invested in Apple or Chevron.
@Just88 This is how the numbers are derived. If shares are bought back at say $2 when the NAV is say $3.40, when the shares are cancelled, the difference between the cost and NAV ($3.40-$2.00) i.e. $1.40, is then distributed among the remaining shareholders. So maximum allowed buyback of 10% paid up capital =14 million shares, surplus of $1.40 each = 19.6 million, shared by remaining (140-14) 126 million shares = 15.55 sen/share increase in NAV. This has the same effect as buying 28 million worth of shares from the market and selling them for 47.6 million, realising a profit of 19.6 million in the P&L accounts.
But when the shares are cancelled, the NAV per remaining share goes up because the discount to NAV is realised, So what the shareholders' gains will be the manager's loss.
@observatory Depending on how the bought back shares are kept in the books. If as treasury shares, there is no change in AUM, just a swap of cash for treasury shares. It is only when the shares are cancelled that there is a reduction in AUM.
@speakup Haha, like that I better start my own CEF then. Last week was the verdict of the court case, so did a bit of post mortem, that's all. Good thing it is along the lines I analysed, otherwise would be accused of posting rubbish again.
Probably some one jumped the gun, the injunction against COL has not been lifted yet, even though it should be just a question of time, unless the company can get another interim injunction pending the appeal to the Federal Court. If permission to appeal is refused, end of story then. Is there a Plan B?
See, what a bunch of short sighted shareholders, willing to leave a dollar on the table and settle for a $2.50 offer, haha. Lock up the shares for another 100 years for your grand children. They will thank you for that.
@i3gambler Unfortunately, the majority of privatisation deals by majority owners were at not fair and not reasonable prices. No doubt at a premium to market, but still big discounts from NAV. Would you accept a $2.50 offer for iCap, for example?
Some Selective Capital Reduction schemes are actually self financing, using the cash sitting in the company to pay for the buyouts. The failed MAA SCR offer is a very good example of a bad deal that ended badly for all parties. I took a small loss because I bailed at the first sign of it not going through, otherwise would have gone down with the sinking ship.
@speakup Unfortunately, most privatisation are actually piratisation, majority owners trying to steal from the minority with not fair and not reasonable offers, hoping for acceptance because of TINA, there is no alternative!
@observatory This is why it is called Risk arbitrage, with capital R. Not a low risk high returns investment as claimed by some, haha.
@thetruthseeker, the GO price cannot be lower than the highest price paid by the offeror, but nothing to stop them from offering a higher price or some other arrangements. One scheme that has ben tried overseas is the 1 cent bid, before reaching the MGO 33% trigger, make a condition offer for all the outside shares with a 2 step payment arrangement. 1 cent for all the outside shares to be deposited into a trust account initially, and all the liquidation proceeds if successful, less a reasonable service charge for doing all the heavy lifting for the rest of the shareholders. If not successful, all shares are to be returned to the offeree forthwith. So for the offerer, there is no risk of landed up with all the shares, but failed to liquidate, other than the 1 cent paid, plus expenses. If successful, realise full value for its own holdings, plus earn a fair fee for helping the others to do the same. For the outside shareholders, the upside is realise full value less a service charge. Downside is return to status quo if attempt fails, what's not to like?
For those risk arbitrageurs wannabes these are the possible future scenarios. Come the 2023 AGM, the company is obligated to propose to shareholders an ordinary resolution (simple majority vote required) for the fund to be continued for another 5 years under its constitution. If such a resolution is not passed, then the company will hold an EGM to pass a special resolution (minimum 75% votes required) to wind up the fund. So there are two hurdles here, 50% to discontinue the fund, and 75% for liquidation. There is a no-man's land here under this scenario, the ordinary resolution to continue is not passed, i.e. the fund is to be discontinued, but the special resolution to wind up is also not passed, then what? Alternatively, shareholders holding more than 10% of the votes may call for an EGM any time to pass a special resolution to wind up the fund. So this is not called risk arbitrage for nothing.
@Nepo Under the Malaysian Takeover Code, whenever there is a change in control of a listed company, the new owners are required to make a mandatory general offer to buy out the minority shareholders at the same price paid to the selling shareholders. The trigger point for the change of control is set at 33%, including those owned by parties acting in concert. So even though the main party may officially only own 20%, but if friends and relatives also own shares and together exceed 33%, then all of them together are deemed to be parties in concert. So funds managed by COL are parties in concert because COL have voting control over them, even though not the beneficial owner of those shares.
The minority judgement is talking about a scenario in which the same controlling shareholders use different nominee names to bypass the 20% individual shareholding limit, which is not the case here. There is no evidence of common shareholdings among the funds managed by COL. The only common factor is management by COL, not ownership control. The next milestone is the parties in concert trigger for a GO at 33%.
Since the recent hottest pieces of news are the Chinese spy balloon and the AI chatbot CHATGPT, I teased the latter with a simple test question:
Is it fair to compare an investment fund's total returns against a price index that is not adjusted for dividends, i.e. not a total returns index?
The answer: "If an investment fund is compared against a price index that is not adjusted for dividends, the resulting comparison may not be entirely fair or accurate. This is because the price index would only reflect the capital appreciation of the stocks in the index, and would not take into account any dividend income received by the investors.
In order to get a more complete picture of an investment fund's total returns, it is generally more appropriate to compare it against a total returns index, which includes both the capital appreciation of the stocks in the index as well as any dividends paid out by those stocks. This will provide a more accurate representation of the returns that an investor would have earned by holding a portfolio of stocks represented by the index.
Comparing an investment fund's returns against a price index that is not adjusted for dividends could potentially give a misleading impression of the fund's performance, as it would not reflect the full return that an investor would have received. It is therefore generally recommended that investors use a total returns index when comparing the performance of investment funds or other investment vehicles."
So this is in line with what I have been suggesting here all along.
Stock: [ICAP]: ICAPITAL.BIZ BHD
4 days ago | Report Abuse
@speakup Local funds have no stomach to get into a messy drawn out court case with someone who will fight tooth and nail over such a move, which is an existential threat.