Text of letter to icapital.biz Berhad

RNS Number : 4684X

City of London Investment Group PLC

28 August 2015

 

CITY OF LONDON INVESTMENT GROUP PLC

TEXT OF LETTER TO ICAPITAL.BIZ BERHAD

(LONDON, 28 August, 2015) - City of London Investment Management has sent a letter (published in full below) to the board of icapital.biz Berhad (ICAP:MK) explaining its intention to oppose the re-election of directors at ICAP's forthcoming AGM.

Background

City of London Investment Group is an emerging markets fund manager which specialises in investing in closed-end investment companies.  The firm is authorised and regulated by the Financial Conduct Authority and registered as an Investment Advisor with the Securities and Exchange Commission.   

For further information, please contact:

Simon Westlake                                                              Jack Hickey

City of London Investment Group                                    Powerscourt

020 7711 1552                                                                      020 7250 1446

[e-mail]                                            [e-mail]

Full text of letter

The Directors

icapital.biz Berhad

Level 18, The Gardens North Tower

Mid Valley City

Lingkaran Syed Putra

59200 Kuala Lumpur

Wilayah Persekutuan

Malaysia

                                                                                                                                26th August 2015

Dear Directors,

Eleventh Annual General Meeting of icapital.biz Berhad (ICAP)

Clients of City of London Investment Management Limited (CLIM) own 19,487,200 ICAP shares (13.9%) and CLIM intends to vote against the re-election of Datuk Ng Peng Hong @ Ng Peng Hay, Dato' Sri Syed Ismail Bin Dato' Haji Syed Azizan and Dato' Seri Md Ajib Bin Anuar at ICAP's 11th AGM.

CLIM is opposing the re-election of incumbent directors because of the Board's inadequate response to ICAP's poor performance and persistently wide discount to NAV. These concerns were discussed with you in detail on 9th February 2015 and the main points were reiterated in a letter sent to you on 5th March 2015. The Chairman responded to our approaches via a letter dated 6th July 2015 but this did not directly address any of the issues that had been raised.

•               Performance

The sections in the 2015 Annual Report dealing with NAV performance make comparisons with a capital only benchmark. Hence shareholders are given a misleading impression of ICAP's relative performance compared to a total return comparison which includes dividends received. On a total return basis ICAP's NAV return in the 12 months to 31 May 2015 was -4.9% compared with the FTSE Bursa Malaysia KLCI (FBMKLCI) -3.9%. This underperformance compared to the FBMKLCI is despite ICAP being less than 50% invested in this period. Shareholders are given no explanation of this poor result from stock selection over the year.

The significance of the capital only versus total return performance gap becomes more serious over the longer term. ICAP's total return NAV performance in the five year period 2 June 2010 to 29 May 2015 is +43.8%. This appears respectable compared to the capital only FBMKLCI +35.6% but it is profoundly disappointing compared to the FBMKLCI total return +60.4% (source: Bloomberg). Shareholders are given no explanation of this poor result from stock selection over this longer period.

•               Cash Management

The five year index total return referenced above, equivalent to a satisfactory 10% pa, indicates that shareholders would have benefitted overall from a fully invested strategy. ICAP's high cash holding throughout this 5 year period suggests a lack of skill in respect of market timing and a limited ability to identify undervalued assets. In these circumstances it is questionable whether ICAP should be incurring fees on cash.

•               Expense Ratio

ICAP's expense ratio in 2015 was 1.9% (total expenses as a percentage of the average of opening and closing shareholders' equity) which compares unfavourably with other country specific closed-end funds. In view of ICAP's poor NAV performance it is also pertinent to compare total expense ratios less than 0.5% pa for exchange traded funds that give investors Malaysian equity exposure. Boards have a duty, in CLIM's opinion, to negotiate competitive fees.

•               Discount Control

ICAP's original prospectus explained clearly that the return for closed-end fund investors is a product of NAV performance and the discount movement. The 2015 Annual Report does not refer to the impact on shareholders' overall return of the discount, which widened over the 12 months ended 31 May 2015 to 21% from 17%, and averaged 20%. Over five years to end May 2015 the discount has also averaged over 20% (source: Bloomberg).  The Board has failed to take any action to address the discount which has, in our opinion, been unacceptably wide. CLIM notes that ICAP's prospectus included a narrative on the tools available to Boards to narrow or eliminate the discount, including share repurchase, open-ending and liquidation. This section in the prospectus also referred to the possible replacement of existing management.

We are dismayed by the reference in the Chairman's 2015 Letter to  Share Owners, to 'investors with shorter-term focus to start requesting our Fund to look into other shorter-term options which do not benefit share owners in the longer-term'. ICAP's performance has been disappointing over the past five years and CLIM regrets the Board's unwillingness to engage with its shareholders to explore possible solutions to this problem. 

For the avoidance of doubt, in respect of its investment in ICAP, CLIM is not and never has acted in association with any other ICAP shareholder. CLIM is a long term investor in closed-end funds and first purchased ICAP shares in May 2010. In the interests of full transparency this letter is being made public.

 

END

 

 

MSCBGGDICUDBGUI