AhYap’s Blog

This blog doesn’t make a single cent and will not make any in the future. Then what is the purpose of setting up this blog? To practice my English writing skill for my triple-one-nine English test? No! It is a blog to show you other ways to look at things. Everything can be seen from at least 2 sides. Everything will have at least 2 stories told by 2 parties involved.

Car A hit Car B, driver A will have different story than driver B. I am here to give you more perspectives. These are not “right” or “wrong” perspectives. They are just “another” perspectives, because I believe if you can see things more ways, you can make better judgments and decisions. And at the end, the more you see, the more you know “you don’t know” and you will be more humble.

Tan Teng Boo responded to the i Capital International Value Fund and i Capital Global Fund performance fee issue that I brought out earlier in his newsletter on 11/06/2010 under “KLSE Conclusion and Recommendation”. Here are the quotes and my respond. All bold are bolded by me for highlight purpose.

To earn the performance fee, Capital Dynamics must surpass the highest and the most difficult hurdle rates and high water mark anywhere in the world. Our unique fee structure is rather complicated (as a result, some investors are confused by it) but it is easily the fairest to clients and the toughest to meet. As our managing director has explained before, if Warren Buffett knew about our performance fee structure, he would immediately pass his funds to us to manage.

So it is now OK for value investor to invest in investments that is complicated and that we don’t understand? Remember the subprime mortgage investments that brought the last financial crisis? They are complicated enough.

If it is complicated, either explain it until we are not confuse, or make it simpler. “Just trust me and I will do the ‘best’ for you” is not an investing method. And the last sentence that quote Warren Buffet (and all other uncountable incidents) is what I mean by his “character” and “ego” that you need to watch carefully. If Ah Beng charges Warren Buffett only 0.0002% performance fee, Warren Buffett will be very happy and send him 30 billion to manage.

As a fund manager, Capital Dynamics must deliver net returns of 6% on (1) a single year and (2) on a compound bases. While many fund managers do not bother to even have a single hurdle rate and still charge performance fee, for Capital Dynamics and i Capital, there are ACTUALLY two hurdle rates to surpass in any single year. And of the 2 hurdle rates, one is actually on a COMPOUNDED basis (any investor who knows how tough it is to compound 6% per annum PERPETUALLY would know how tough this hurdle is).

No one challenge on this. This is true, correct and absolutely right. We are not trying to bring out this issue. We are trying to bring out an issue that most investors would have missed, a loop hole, a flaw, where if the fund NAV goes up and down a lot, the fund manager will be able to charge performance fee on “non performance”. If you invest at $1,000 the first year and it drops to $600 the second year, then rise back up to $1,400 the third year, the fund manager will charge you performance fee based on the profit from $600, not your initial investment of $1,000!

Again the metaphor is, if there is a mechanic and you send your car to repair, he can poke all your 4 tires and charge you for repairing it. And he can do it again and again. Poke it, fix it, charge you, poke it, fix it, charge you … as long as he is able to meet the 2 hurdles mentioned above. A long posts has been written on it and will not be repeated here. Read Tan Teng Boo’s i Capital International Value Fund and Global Fund and ALL comments in that post.

In this Star article, Up Close and Personal with Tan Teng Boo, he is quoted saying, “I’m pretty damn good at what I do. I would say I am one of the top five fund managers in the world. It is a pity that people don’t really recognize that.” If the top 5 fund managers in the world can only compound at 6%, everyone should just put their money in the fixed deposit, or better yet, AXREIT. And I doubt Warren Buffett want to pay 20% performance fee on 6% compounded return.

Again, some supposedly smart investors do not even know that our 6% compound hurdle rate is a high water mark and that it is the toughest high water mark anywhere in the world. Why ? For the simple reason that this high water mark is rising at 6% (net of all expenses) perpetually, even on Sundays and public holidays !! Can you get rich with 6% compounding ? You bet. Even Warren Buffett imposes a 6% hurdle rate. Any investor who scoffs at 6% compounding is either a dangerous gambler or a conman.

Warren Buffet imposed a 6% hurdle rate with his early partnership. He also imposed a high water mark where performance fee will not be charged again on the portion where it has been charged before. On the other hand, Capital Dynamics can double or even triple charge performance fee depending on how volatile the NAV is. So it is not apple to apple comparison.

Scoff = Laugh at, Tease at (I have to Google this word! I am certainly not a “smart” investor.) Again, top 5 fund manager in the world, 6% compounded return? Gurufocus.com has tons of gurus that can do that and certainly all of them cannot be in the top 5 of the world. Even an unmanaged index fund can easily do that. Who is “scoffing”? Who is the gambler? Who is the conman?

A high water mark is supposed to protect investor capital, means locking it, out of touch for performance fee, and yet, this look-real-look-fake illusive “high water mark” is doing 50% of the job. Once it qualify for performance fee, it won’t be used to calculate the profit, instead, last year NAV will be used. If last year NAV sucks a lot, large portion of the fund will be subject to performance fee. Again, read the old post, and look at how 2009 performance fee is calculated. The exact issue is that the “high” water mark is not doing a complete job. It is not protecting the initial capital and the portion that has been charged a fee before. REPEAT! The main issue we are talking all the time is – It is not protecting the initial capital and the portion that has been charged a fee before.

The 2 hurdle rates of 6% on a single year and compound bases are so tough to meet that if our fund’s net asset value mirrored the Dow Jones Industrial Average from 1926 to 2009, Capital Dynamics would have earned a performance fee in only 2 years of out of a total 84 years. In 1926, the Dow Jones Industrial Average was trading at 157.20 points and by 2009, it was trading at 10,067.33 points. The typical fund managers, assuming they have a simple 6% annual hurdle rate to surpass, would have earned a performance fee in 24 years out of the 84 years.

If we need to invest in Dow Jones Industrial Average, we can buy the ETF or similar mutual funds that charge very negligible fees. But I don’t think the “Top 5 Fund Manager” in the world should compare himself to an unmanaged index, especially where investor need to pay performance fee for him to perform. And again, the issue is double charging (or triple charging) of performance fee, investors are very happy to pay performance fee if the fund is really performing. But we are not happy when someone dig a hole himself, climb back up and brag about it.

Also, showing this statistics is a double sided sword. I would like to ask the fund manager this question – For “typical fund managers” who earned 24 years performance fee out of 84 years, how many of them actually beat the market, i.e. the Dow Jones Industrial Average?!!! You will be shock that almost all funds can’t beat the market and so paying them 24 years performance fee is “overvalued”.

The performance fee structure of Capital Dynamics and i Capital is based on achieving long-term investment objectives. As our managing director explained in the recent i Capital Global Fund 2010 Gathering, we would be able to earn a massively huge amount of performance fees if we instead listened to the suggestion of some investors and change our performance fee structure accordingly.

Surprise! Surprise! This paragraph and the next few paragraphs are missing in the online version, it is only in the printed version. Did they regret writing it and remove it later? Because this is the juice of the post!

The new “suggested” performance fee structure is not explained here, so we don’t know what is it, set a real high water mark but change the performance fee from 20% to 50%? We don’t know. But what I don’t understand is, which investor in the world will suggest his fund manager a new performance fee structure so the fund manager can earn massively huge amount of performance fee from him?!! What logical sense is that?

In fact, in the dinner Gathering, he actually offered to amend the current performance fee structure based on the suggestion of some investors. Of course, his suggestion was flatly rejected.

This is the kicker. If “some investors” make a suggestion, how could it be able that the suggestion is “flatly” rejected? Then who suggest at the first place? And what is their suggestions? Who on earth will reject a proposal to increase their investment return, i.e. reducing the performance fee or setting a “real” high water mark? Or is it because only 2 people attended the Gathering? More clarification required.

Any investor whose investment horizon is only 6 or 12 or even 24 months would never understand our very unique and demanding performance fee structure and how fair it is to clients.

The fund is 35 months now, not 6 or 12 or even 24. The truth on what has happened is everything we need here. After a “short term” of 35 months, the Global Fund NAV is $1,019.62. A return of 1.962% for early investor. On the other hand, the fund manager has charged more than 15% fee to the early investor. A profit sharing of 12% (investor) to 88% (fund manager) while the investor bear all the risk since they are the one putting out the capital.

The way our performance fee is structured goes far beyond what is normally understood as putting investors interests as the number one priority. Clients pay $1.00 and get many dollars back in return.

Client pay $1.00 and get 1.9 cent back, not many dollars, not even many cents (in 35 months!). Fund manager get at least 15 cents. This is not a subprime investment, or options or futures. This is supposedly a “can sleep soundly” investment as the fund manager “promised”. And to sleep soundly, investor need to know exactly how performance fee is charged. Chinese saying, “Protect your house day time, protect your house night time, at the end you still can’t protect your house if one of your family member is the ‘thieve’”. [日防夜防，家贼难防] If it cannot be “normally understood” this is not a “can sleep soundly” investment.

As we wrote at the beginning of this article, under our fund management services, we only accept clients that understand and share our Intelligently Eclectic Value Investing philosophy and to Capital Dynamics and i Capital, integrity is of vital importance.

Integrity … lol. “Talk” integrity and “Do” integrity are 2 different thing. At the end, it is what you do that counts, disregard to how well is your speech. To demonstrate the real integrity, let’s see what Mohnish Pabrai is telling his investors.

All three funds are below their historic NAVs and hence no fees were earned by any of the funds for the quarter. My immediate family has a stake of 455,562 units of PIF2; 8417 units of PIF3; 1,224,824 units of PIF4 and about 25,000 units of PIF4 in a retirement account. This stake is worth about $42 Million.

Besides the  previously disclosed  stake  and small investment in Dardashti Capital  (worth about $1.3 Million), my family has no interests in any other mutual funds, hedge funds or private equity funds.  I have a deep vested interest in the future performance of Pabrai Funds.

Pabrai Funds charges no management fee, just performance fees  – which are ¼ of the returns over 6% annualized (subject to high-water marks). I only get paid when you make money. When you win, I win. Our interests are completely aligned. I am very bullish on the long-term future of Pabrai Funds – as demonstrated by my being the single largest investor in the funds. Investors who add funds when we are below the high-water mark (like now), get a free ride (no fees) until we’re back at the high water mark plus 6% annualized from that date. It is a great deal.

i Capital Global Fund and i Capital Value fund charge 1.5% management fee no matter they make money for you or not. Pabrai charges no management fee.  Pabrai charges 25% performance fee instead of 20% but it is subjected to high water marks which means unless it beats previous high, he can’t charge any fee. Maybe in the next iCapital newsletter, Mr Tan will compare himself to Mr Pabrai.

International Value Fund 2009 NAV is $1.0112. If it shoot up to $1.50 this year (2010), he will charge fat performance fee ($0.079). Then if it drops back to $1.00 next year (2011). No performance fee. And the 3rd year, if it ends up at $1.30 (2012), significantly below previous high of $1.50, he can still charge you fat performance fee because it is above 6% from $1 (first hurdle) and 6% compounded for 3.5 years which is $1.226 (second hurdle).

How much is the performance fee? 20% of ($1.30 – $1.06) = $0.048! $1.06 (6% above 2011 NAV) is used when calculating how much is charged, not $1.226! The NAV after fee will become $1.252. Remember the ending NAV is all you have got no matter how high it has hit before. Although the fund has hit $1.50 before, it is only “paper” and “historical”. You got your 25 cents profit while the fund manager has charged twice fat performance fee in year 2010 (7.9 cents) and 2011 (4.8 cents). This is how his performance fee is structured.

The more long term you are, the more chance you will encounter it. No underperformance fee is charged when the fund drop from $1.50 to $1.00. No allowance for you to buy sleeping pills on your sleepless night too when you see your “paper profit” evaporate when the fund drop from $1.50 to $1.00 [While the fund manager has pocketed 7.9 cents earlier and sleep soundly].

The missing paragraphs in the online edition ends here. The following appear both online and paper. Probably they will add back the missing part after they read my post.

Given the turbulent economic and market conditions, how should subscribers position themselves ? Being a value investor helps. Value investing allows one to turn turbulence and volatility into opportunities. For investors, the i Capital International Value Fund is an obvious choice. The Australian Dollar has dropped against the Ringgit. Its NAV has fallen. Essentially, one gets a double discount.

Being a value investor indeed can turn turbulence and volatility into opportunities, but only with the correct performance fee! If a performance fee can be charged again and again by running around the field (you run 10 loops you are still standing on the same spot), then it is the fund manager that turns the turbulence and volatility into their opportunities. The fund manager wins, you lose.

And why the fund manager choose to promote his International Value Fund instead of ICAP which is more of a bargain? Because ICAP is a closed-end-fund so doesn’t need new customers/investors?  Because ICAP doesn’t charge any performance fee and so they are not interested in promoting “low margin” product?

If you are an investor, Tan Teng Boo is showing half of the picture to you, I am trying to show you the other half. I am not here to debate right or wrong, I just want you to see the whole picture. I didn’t charge you blogging fee and performance fee!

p/s I want to thank bullbear for writing the article on i Capital Global Fund and Value Fund Performance Fee.

Some other good reading (surprise!)

http://forum.lowyat.net/topic/983076
http://forum.lowyat.net/topic/773147

Got this from soufulow, very funny and must be shared here! [since this blog used to be about sohai and streamyx]

— — —

I just had this conversation with one of the so-call streamyx ‘technical’ support, very interesting:

Me: "Hello I cant connect to Internet with my streamyx, can you please check?"

Streamyx: "Yes sir can I have your name… blah blah blah"

Me: "Sure, I am this this this, my phone number is this this… I have do all the router restart and blah blah blah…"

Streamyx: "Oh okay, can i have your IP address please?"

Me: "IP address? I don’t have an IP address because i cant connect to streamyx server. that’s why i couldn’t get online…"

Streamyx: "(in exact word!) "yeah i know, but can i have your IP address?"

Me: "Cant you hear me? I couldn’t connect to streamyx server, how can I have an IP?"

Streamyx: "okay if in this case can you ping your IP?"

Me: "I dont have an IP address!"

Streamyx: "…. (ignoring me completely) you go start, program, command prompt, and type ipconfig…"

Me: "Friend, are you listening? I don’t have an IP address…. how can I ping it?"

Streamyx: "(in exact word!) Oh like that ar, you computer cannot ping then its your computer problem lar."

— — —

This reminds me of my post Sohai Streamyx Technician – Why Send a Sohai to My House? 

And I find it very interesting that there is a plural form of sohai!!! i.e. sohais! wakakakakakakaka.

Streamyx has been very slow lately. Again if you call in and a recorded sound will blame it on the cable again [poor cable, always kena blamed]. Their cable don’t know why must putus every month.

According to the voice, it will be end of the month before it can be fixed, zzzzzzz. If you do a speedtest at speedtest.net to a Malaysia server, the speed will be blazing fast because cable connecting within Malaysia is not putus. But if you try a US server, your speed is almost 0, tak jalan langsung! Because the international cable kena gigit ikan jerung.

I called Streamyx yesterday and the sohai use the same trick again and tell me everything is OK because my connection to the Malaysia server is fast! He said cannot test US server because it is too far. He say, “Jangan. Jangan. Itu jauh lar! Test Malaysia cukup.” lol.

And how often do we really surf a website hosted in Malaysia? Or how many great websites are hosted in Malaysia?! And if it cannot connect outside Malaysia, that means Streamyx is useless!

Again, these are not new issues. We have been talking about it for years and it just coming back to hunt us. Streamyx inside Malaysia Boleh, but outside Malaysia, Tak Boleh. That’s why I am really not interested in all those what what “High Speed Broadband” and the what what “4mbps package”. What are the use of those when you can’t deliver a 1mbps properly? 

Long way to go Malaysia. Even if we fixed TM, we still have Maybank, Proton, Pos Malaysia, MAS, KTM, PRDM … the only effective entity in Malaysia is Inland Revenue Board (Lembaga Hasil Dalam Negeri)!!! [Ok ok, to be fair, Bank Negara too] It will be a long long time, if it ever happens that these companies can be like IRB and Bank Negara.

Never in my memory I have ever seen such a big movement in 1 day. This is happening in Europe today. Market is so volatile nowadays. If you are a short term trader (or even better – day trader/forex trader/options trader), I really don’t know how you can sleep well every night.

Please read this blog post ‘China-apeks’ In Bursa by the most influential Malaysian blogger on KSLE. I follow his blog daily and I think you should too.

If you have read my previous article on The 2 Stock Trades That Inspire Me The Most, you will know why I ask you to read that blog post.

See how they are related, especially its similarity to Lesson #7. After that, your homework is to modify Lesson #7 by filling in the blanks below based on the new knowledge you obtained from the blog post.

Lesson #7. Sometimes, people sell because __________________________, you got to take advantage of that!

There is no ending to learning. Cheers!

It has been more than 3 years since I seriously invest and learn about stocks. And before that, I was trading US options fruitlessly for 2 years singing this song called “My Money Live Over The Ocean”. [Trust me, it’s a good song!]

That day I looked at all my previous stock trades and wrote a brief review on each one to learn more from my trades. It is far easier to learn from real trades than paper trades because they have strong emotion attached.

And there were 2 stock trades that inspire me the most out of all. They totally change the way I look at stocks and how to make money from them. The lessons learned are so useful that I am able to deliver incredible results for myself beating all major indexes by a big margin since I went global September last year. I want to share those lessons with you so you can learn too.

The First Inspiring Trade – HAIO

I bought into HAIO on January 2008 after reading its review in iCapital’s Newsletter. I jumped on it immediately. That was the same feeling I have when I read BSTEAD review. The revenue are growing so fast, so furious and yet the PE is only 5! (read my post on Understanding PE Ratio). While the HAIO store in Ipoh gives me a lousy business feeling, the reason why they are growing so fast is because of their MLM business. I do know a bit about MLM because I have many friends in MLM and Robert Kiyosaki also recommends people to go into it.

MLM business is a very special type of business because it doesn’t require a lot of capital ($$$). What it needs are people and networks. And the network is something that explode, 1 becomes 2, 2 becomes 4 … While there are many MLM businesses in Malaysia, usually if the model works, it works (if it doesn’t, it doesn’t!). So the numbers that HAIO is delivering tell us that the model works very well.

One of the biggest reason is because they are targeting the Malay ethics which represent 70% of the population! They are selling them things that they are interested in but confused with, i.e. Chinese traditional medicine. So the MLM model works very well. A Malay asking another Malay to eat Ling Zhi is easier than expecting a Malay to go into Hai-O retail store to buy it himself no matter how much money you throw into advertising!

Another point is that they have a 50% dividend payout policy. Which means for every 1 Ringgit they make, they will pay their shareholders 50 cents dividend! To get it short, it is a good business selling at very cheap price, so I load up a big portion, more than 10% of my portfolio.

Later in ICAP AGM, they revealed that they have loaded 1% into HAIO, which gave me more confident on Hai-O.

I bought at around RM1.20 (adjusted) and it goes to RM1.50 in a few months. However, when I told my mum that, she said, “Ceh, 30 cents only mar”. If you have this kind of thinking, your brain will need some “calibration”. I still have problem calibrating my mum’s.

30 cents rise for a RM10 stock is different than 30 cents rise from a $1.20 stock. The first is only a mere 3% gain, but the second is a fantastic 25% gain! We need to measure performance based on percentage, not dollar or cents. If you see your stock goes up 25% in just a few months, it is damn good!

The price today after adjustment (it split before and the chart adjusted for 2 large dividends) is RM4.50 in 2 years. 2 years, the return for buying at RM1.20, is 375%!!! 375% return in 2 years!!! How many years do you need to put your money in FD or Amanah Saham to get 375% return?

Should I be happy? Should I be proud of myself? The reason this is a trade that I will never forget is because I sold it after 1 year at around the same price I bought into it. [Should I put or here] Total return I get for 1 year is less than 10% (capital gains and dividends) I sold a stock that is supposed to give me 375% return for less than 10%!!!

The reason I sold? Fear due to global market panic. And that the iCapital newsletter changed its ratings from Buy to Hold. I didn’t do my homework, I just sold out of fear. See how powerful fear will drive us.

I learned several important lessons.

Lesson #1. There are stocks that can go UP even the market goes down. HAIO go up or at least holding well even the whole global market tanked. Because it is fundamentally strong and it is already selling dirt cheap.

Lesson #2. The price you pay is very very important. If you get it very very cheap, like PE5 for HAIO, you will get extremely good reward. In value investing, the higher the rewards you want, the less risk you need to take! [read again, low risk high return]

Lesson #3. Some stocks have no other way to go other than UP! These are wonderful stocks selling very very cheap.

Lesson #4. Do your homework. Stick to your own conviction. Even if you are challenged by the authorities, even if you need to go against the crowd. By doing so, even if end up wrong, you can still be responsible for yourself because it is your call. If you do it because someone tell you so, you will blame that someone and never learn.

Don’t you think he looks like Warrent Buffett?

What I did later is very surprising (to myself at least). After selling it 1 year earlier at around RM1.30 and miss all the upside and dividends, I load up a big chunk again in 1 day after I re-evaluate the company on 23/12/2009 at RM3.30 because I still think it is cheap (Read: A stock that has gone up 375% in 2 years is still cheap, am I insane?). And surprisingly among the 5 stocks I am holding today, it yield me the biggest return of all! 37% without even counting the fat dividends I have received so far!!!

Lesson #5. Stocks that have gone up a lot doesn’t mean it is expensive. Stocks that have dropped a lot doesn’t mean it is cheap. You got to do your homework. The market price tells you nothing.

This remind me of what my favorite investor Mohnish Pabrai has to say, “Few Bets, Big Bets, Infrequent Bets”. What it means? It means you only want a few fish. You wait and wait and wait until the BIG FISH comes to you, you bet BIG on it. And because big fish doesn’t come to you everyday, you make infrequent bets and ignore the small fish.

I read his book “The Dhandho Investor” twice. I almost never read a book twice. I read it the 2nd time before I went global on August 2009. You got to know how valuable this book is!

While not all stocks will give you 300% return, you need to remember that to make big money in stocks, you got to have a few of these stocks in your portfolio. These are the extremes in your portfolio that will make your portfolio very good even if you have other lousy picks. If you have made 3 trades where 1 is HAIO and the other 2 went belly up, you still make money, I mean good money! See how powerful it is.

The Second Inspiring Trade – AXREIT

Axis REIT had never traded below RM1.60 since its inception in 2005. But the market panic is so severe that it went free fall like the “jump building machine” in October 2008. This is supposed to be a “widow” stock, a stock that is supposed to be safe to widows because of it’s stable dividend income and it’s wonderful portfolio of great properties in Malaysia (mostly in KL). I always wanted to own a REIT but I am not interested with the 8% return (from dividend). I want more than that since I am willing to put in more effort than everybody else. So I never bought one even I am familiar with REITs at that time.

The difference is that most AXREIT holders didn’t have that smiling face you see here.

But the free fall went so fast, so furious that on one day, I noticed that the dividend yield was almost 13%! I rushed to read its most recent annual report. I went to check on all other REITs as well that I can get my hands on. I found out that AXREIT is a very well managed business with a great portfolio of properties compared to other REITs. It owns around 20 properties at that time from buildings to warehouses to even shopping mall.

The largest tenant contributed only 10% to the total rental income. Plus in the following 1 year, only 10% of the tenants will reach maturity. So what is the risk? If none of the tenant want to renew, they will lose 10% of the rental income. If the biggest tenant quit, it will be another 10%. But if Fedex has spent a lot of money setting up a base, I don’t think it is cost effective for them to move away even when the tenancy agreement has expired. They will most likely to renew it. I really see no risk and I am mouth watering for the 13% dividend. [Picture: Manara Axis]

I loaded up a large chunk in 1 day on 10 December 2008 at RM1.14. The volume was incredibly high on that day so everyone who wanted a piece of it can get it. Know what? It dropped to RM1 the next day with even higher volume! A drop of 14 cents is not 14 cents but 12% lost in 1 day! And that is a huge lost, at least on paper.

Guess what I did? I increased my position by 25% the next day using margin at RM1.01 (borrowed money). I also kept pitching to my parents on this stock. Luckily I did not need to put a gun on their head to force them to buy. They seems to be very intelligent this time and I helped them to buy in at RM1.01. At RM1.01, the stock will give you around 14 cents dividend a year, easily beating Amanah Saham Wawasan 2020 or 3030 without taking into consideration the upside potential of the stock!!! [Picture: Nestle House]

This trade is a super no brainer. But why people sell it? If we know the reason, it makes us easier to buy in. There are many property based mutual funds that invest solely on REITs or other similar property stocks. But there are only that much REITs in our region. Maybe we have more of these mutual funds than REITs itself!

Being the big brother of REIT in Asia, AXREIT will be one of the top holdings of these mutual funds. As you know, when fear kicks in, everybody sells, especially the individual investor that knows nothing about investing. They sell their stocks, they sell their mutual funds. So people started to redeem their mutual funds and the fund managers have no choice but to sell AXREIT even at ridiculous price! They have no choice! The fund manager knows they shouldn’t sell AXRET but they have no choice! They need the cash to pay the redeemers. [Picture: Kayangan Depot]

So if you are an educated individual investor, this is where you come in to make big money. What is the risk here? The fundamental of the stock has not changed, or at least “not yet seen”. Tenants don’t move out in 1 day. Even if the tenants really move out at 20% rate, you still get fat dividends of more than 10% per year. But remember that the vacant building is only temporary because you still own the properties which can be rented out to other tenants! So what is the risk? There is almost no risk. This is another low risk high return example. To get the bigger return, take the lowest risk!

Another possible reason of this free fall is because of margin call. Because everyone assumes it is a “super safe widow stocks”, they are willing to borrow money to owns more of it. But borrowing money to buy a real properties is different than borrowing money to buy stocks because for stocks, how much you can borrow depends on the ending stock price every day. It changes everyday. No one expect it to drop below RM1.60 but when it does, it sparked a disaster to margin players. Force selling kicks in. The momentum went on and it rolled bigger and bigger until all margin players were kicked out [burned out]. [Picture: Axis Plaza]

You may be surprise that the biggest reason I buy into this stock is not because of the 12-14% dividend I want! FD rate is only 3%. If someone found a safe investment that give them 12% return, what will they do? They will automatically be tempted to buy! Sooner or later, people will rush in to buy the stock given the fundamentals don’t change much.

So when more people buy, the stock price will go up, which means the yield will drop. But when it drops to 10%, people will still be tempted to buy because it is still a good yield! Amanah Saham only gives 6% but everyone willing to queue 3 hours early morning to buy. So the yield has to drop more to some place to justify their risk appetite. Let’s say people are happy to take the risk for 8% yield, with a 14 cents annual dividend, that would need a share price of RM1.75 to justify the yield! [Picture: FCI Senai]

What I am looking for, is not the 14 cents dividend that I will get, what I am looking for, is the appreciation of the stock price from RM1.14 to RM1.75 in a short period of time!!! Because that would be 61 cents or 53% gain in short period!!! If it didn’t happen in short period, I will still get 14 cents per year as my safety net. So where is the risk? Isn’t this a no brainer if you can calm down and think without looking at the crowds? [Picture: Giant Sg Petani]

Even if individual investor are foolish, fund managers are not. The fund managers who are forced to off load the stocks earlier due to foolish individual investor redeeming the fund will start to load it up again once their redemption is under control. Because it is very obvious to them that it is a bargain. Even if the fund managers are idiots, they will still buy it if the theme of their fund is “real estate funds” because there are only that few REITs that you can buy!

Mohnish Pabrai another favorite quote is, “Heads I win. Tails I don’t lose much”. It means if you toss a coin and it is head, you win big, if it is tail, you lose just a little. It again pointed to what we want – a low risk high return investment.

The fundamentals of AXREIT didn’t worsen. It actually gets better with the increase of rental income and dividend payment! It even changed its dividend policy from half yearly to quarterly meaning that you will get paid more frequently. It is also approved to be an Islamic REITs which means more people and more funds can buy into it.

In lesson #3, I said, “Some stocks have no other way to go other than UP!”.  People starts to buy and pushing up the stock price while lowering the yield. I sold everything at RM1.78 when I want to go global. That’s more than 70% return including dividends in almost a year. I sold because at that price, you no longer can expect big gains in short time, however you can still get good dividends at 8%+. The stock won’t go down much (unless another panic). It won’t go up a lot either.

What are the important lessons learned?

Lesson #6. To make big money from dividend stocks, you make it from the stock price, not the dividends! You buy a stock with fat dividend yield and sooner or later, someone will bid up the stock price while pulling down the yield to an acceptable one. [Another example which I rode too is PBBANK]

Lesson #7. Sometimes, people sell because of fear and because they have no choice (the mutual fund manager and the poor margin player), you got to take advantage of that!

Lesson #8. In order to make big money, you have to repeat what you do instead of holding your stocks forever. Once the stock price go up to a normal price and is no longer interesting, sell it and swap it with other bargain stocks and repeat the process again and AGAIN AND AGAIN!

Riding on these precious lessons that I have learned, I went full fledged into global stocks (in Hong Kong and US). There is only one possible result – good result. I’ve closed many of my trades now. I will try to share some of my closed trades to you to illustrate the lessons more clearly later. I will also teach people who want to invest globally how to do so. I hope you have learned something today.

Disclosure: Owns HAIO. Parents owns AXREIT.

A few years ago, Tan Teng Boo had only one thing to sell you, his newsletter.

Later he launched his first public fund known as the iCapital.biz Berhad (ICAP) listed in KLSE which I did a long review long long time ago. [iCAP review]

But last few years, he subsequently launched 2 other funds to sell to you, namely the iCapital Global Fund and the iCapital International Value Fund.

Due the the iCapital Global Fund big minimum investment requirement (USD200k!), many are kept out of the boat and so he launched his “International” fund in Australia later that requires only AUD20,000 minimum, so more people can join the “global investing” boat.

Now, Mr Tan has so many things to sell you other than his newsletter.

Some of these stuffs are good stuffs to buy, some are …

To make my writing easy, i Capital Global Fund will be called the “Global Fund” or GF. i Capital International Value Fund will be called the “Australia Fund” or AF because it is setup in Australia. And the KLSE listed iCapital.biz Berhand will be called “ICAP” which is also it’s symbol.

ICAP is a closed end fund. Which means the number of units is fixed. The Wednesday NAV will be published each week after the market close on Thursday. So you will know how much the stock is really worth. By the way, NAV means Net Asset Value. However, you didn’t buy and sell based on the NAV, you buy and sell based on the supply and demand in KLSE. So it can trade above or below the NAV. Now, it is traded significantly below NAV. I will try to guess why later in this post. To know more about ICAP, you got to read my long review.

On the other hand the Global Fund and the Australia Fund is open-ended exactly like mutual fund. The number of units is not fixed. When more people buy, more units are issued. When more people sell, units are canceled. You buy and sell based on the NAV. As you know, I don’t like mutual fund.

“Mutual Funds are license to steal”, Martin Whitman.

But the bad news is, the Global Fund and the Australia Fund is structured to benefit the fund manager more to the investor.

A normal mutual fund allows you to buy and sell everyday. So it has an disclosed NAV everyday. The GF and AF only have 12 NAV a year (once a month at end of month). You can only buy based on these 12 prices. And you are only allowed to sell end of each quarter. That means only 4 exit prices each year. All invested money are locked up for 1 year before you can sell.

Why this is a big problem? First they make it easy for you to invest in it. All you need to do is send your money in near end of month. But when you try to get out, you start to have headache. First there is a 1 year lock up but since you should be a long term investor, that is not a problem. But the problem is, all withdrawals require a 2 months advance notice! So say you want to sell now, you need to look at the calendar. The next quarter end is June and you will need to send in your withdrawal notice before end of April. You will get your money in July but the BIGGEST PROBLEM is your exit price is based on June NAV!!!

That means you need to guess what the market will do in the next 2 months! You need to pray that at least the market won’t drop that much. A lot of things can happen in 2 months and if there is a big correction and your timing is wrong, you suffer a lot. For a normal mutual fund, when you submit you exit notice today, it will either use today or tomorrow’s NAV depending on what is the cut-off time. But for GF and AF, they are using a price 2 months after your withdrawal request!

This is a good design for the fund manager since money can go in easily but hard to get out. An investor who invest big and want to avoid disaster will try to withdraw only partially. But you can only withdraw 4 times a year! On on the buy side, you can invest every month, and each investment has 1 year lock up. That means it is easy to go in but hard to get out. So the fund manager can charge you at least 1 year of management fee (1.5% of NAV) and best, “some” performance fee (I will explain later).

A normal mutual fund will charge a 6% entry fee. If you invest a larger sum, the fee can be negotiated maybe even to just 3%. GF and AF doesn’t charge you entry fee but please be warned that they charge a very hefty performance fee. Every time they are able to “perform” [note the quotes I put to the word], they will get 20% of your “profit” [note again the quotes I put].

If you want to invest in either fund, you need to consider how this performance fee will eat into your cake because the way the performance fee is calculated will benefit the fund manager more than to the you.

When you invest in a long time horizon, the market will correct time to time and you will have big bull and bear market time to time. For example, 30%, –10%, 25%, –5%, 44% …

When can the fund manager charge a performance fee? It is when…

1. This year NAV is more than 6% of last year NAV.

2. This year NAV is more than 6% compounded return since inception.

The performance fee of 20% is based on the portion over 6% gained compared to last year NAV.

I highlighted the word “compared to last year NAV” because this fund can do nothing and still make a lot of money from you. Remember that I quote the word “perform” and “profit” earlier? There are many flaws on how they calculate the performance fee.

Market go up and down a lot in the long term, it is very cyclical although the long term direction is still bullish. But investor are not protected with high water mark. All calculations are based on last year NAV which means performance fee can be double paid or triple paid many many time if the market go up and down a lot.

The Global Fund started in July 2007 at $1,000. All previous price are available here. On Dec 2009, 2 and a half years after inception, it is at $1,173.803. I would say this is a mediocre performance. 17.4% for 2.5 years, without taking into consideration how much USD has dropped against RM (I believe most investor are Malaysian).

But you will vomit blood if you know how much the fund manage is making by delivering this kind of return [via performance fee]!

To simplify the calculation, assume the averaged NAV is 1,000 each time they charged the management fee, they would have 1.5% x 2.5 = 3.65% on management fee. [Note, management fee is not performance fee. It is fixed at 1.5% per year charged by 0.375% each quarter]

2007 performance fee is around 0.9%. After fee NAV was $1,064.527.

2008 the fund performed poorly. No performance fee was charged. Year end NAV is only $695.955!!! [Bad news for investor, great news for fund manager]

2009 the fund recovered. The NAV before performance fee is $1,279.87. Should you be happy?

Wait a moment! It shows a “remarkable” return (the word Tan Teng Boo used in his newsletter) when you compare it with last year NAV of $695! The 6% compounded return protection for the investor is 1,000 x 1.06 ^ 2.5 =  $1,156.817 which is below the NAV. And so the fund manager is allowed to charge their performance fee because they “perform”.

The “profit” is 1,279.87 – 695.955 = $583.915. The 6% “protection” for the investor is 695.955 x 6% = 41.757. So their 20% “performance” fee on your “profit” is (583.915 – 41.757) x 20% = $108.432!!!

I have to admit that I should have pay more attention in my math class so I can do better math. My results are off a bit with them. My after fee NAV is 1,279.87 – 108.432 = $1,171.438 but their calculation is 1,173.803 (no nig deal, off by only 0.2%). That means their calculation of performance fee is slightly lower at $106.067.

Using their number, $106.067 means 10.6% return based on the launching price of $1,000 for the fund manager!

If the fund is 95% invested at that time, there is not even enough cash to pay the performance fee and they will have to sell some stocks!

Total return for fund manager is 3.65% management fee + 0.9% 2007 performance fee + 10.6% 2009 performance fee = 15.15%! They make 15.15% compare with 17.4% for the investor! They deliver a mediocre 17.4% to the investor but have since charged ~15% fees!

If you still didn’t see the problem. Let’s say you listen to Mr Tan to “top up” more to the fund and have invested at November 2009 at $1,265.08. Next month the fund did continue to do well but now you are left with only $1,173.803! You lost 7.2% in 1 month WHILE the fund perform well due to the way the performance fee is calculated. It didn’t perform for you, but still you need to pay the “performance” fee. The same thing happened to those who invest earlier at higher NAV.

Big up and down swing happens very frequently especially when you are a long term investor. As Tan Teng Boo himself is very well aware of this when he says one of the character of his “i Capital Long Boom” is “Cyclical Inflation, Secular Boom”.

While structuring the fund this way is “Intelligent” to the fund manager, but I think they lost a lot of “integrity” in doing so. They should have set a high water mark in their calculation to protect the interest of investor.

When the fund is at around $1,073 before performance fee at December 2007, they have charged a performance fee on that performance! So the $1,073 should somehow serve as a “high water mark” because investor has paid a performance fee for that performance! No performance fee can be charged again for this portion! It should be safe with the investor. Or else it would be double pay (or even triple pay) for nothing.

You may think the 6% compounded return rule is for protection but it is not because once it fulfilled the criteria, the performance fee is based on last year NAV, not the compounded number. It never serve as a high water mark.

The Australia Fund is structured in exactly the same way as the Global Fund. While it is new, the same thing will happen to it one day.

Lesson learned? It is better to stick with ICAP. The moon overseas is no brighter. The grass next shore is no greener. ICAP NAV is up more than 30% since the inception of the Global Fund and the market price is up 15%. The Ringgit has appreciated more than 10% since that time, easily beating the GF.

ICAP doesn’t need to pay fat performance fee. ICAP even allows you to buy at a discount below it’s NAV! It also allows you to buy and sell everyday so you don’t need to have sleepless night and an heart attack 2 months later. Your minimum investment is so low that you only need RM3,000 to invest [You can invest only RM180 for 1 lot but it is not cost effective after considering the brokerage commission].

Now comes the second part of the post.

Why ICAP now trades below it’s NAV? Is it still a BUY?

The first time the price trades below its NAV is when Tan Teng Boo launched his Global Fund, people sell ICAP and switched it to the Global Fund, thinking it might be the next gold rush. So the price for ICAP dropped a lot due to more selling than buying while the NAV is not affected.

But many people complaint that they can’t invest in his Global Fund because the minimum is too high. So he launched his Australia Fund with smaller initial investment requirement. So now even more people sell ICAP to invest in it!

Now Tan Teng Boo fans has 3 funds to invest in. He has diversify the initial investor in ICAP into 3 funds! And since he can makes more money with his foreign fund, he promotes it more [you read the newsletter, you know, how many pages he spend on promoting his Australia fund? How many on his Global Fund and how many on ICAP?] Lower demand for ICAP means lower stock price. So this is the first reason.

Some people also notice that Tan Teng Boo has changed a lot since the last few years when he has his Global Fund. His tone is always bullish. I wouldn’t say that’s because he has something to sell you so he has to bullish. But he got it so far that he is comparing himself to Warren Buffet and call Warren Buffet “A brilliant investor but a lousy economist!”

Warren Buffet is the 2nd richest man on earth! Tan Teng Boo is … hmmm …

I am happy when I realized it’s not me that felt that way because someone actually wrote to him, ended up his comment is being published in his newsletter [he defended himself]! His character is something that you need to monitor now. It’s better for us to be humble. Maybe that’s another reason why people start to doubt about him.

28/3/2008 – In one of his recent company visits, our managing director was told by that company’s official that Warren Buffett had said (Warren  Buffett  had just appeared in a special live CNBC interview) that the US economy is in a recession and our managing director replied that Buffett is a brilliant investor but a lousy economist.

Repeated again as BOLD HEADLINE at 25/4/2008

“Buffett is a brilliant investor but a lousy economist”
– TanTeng Boo

13/6/2008 – Hey, US retail sales, the mother of all sales, rose a very healthy 1% in May and Apr’s sales were even revised from a fall to a rise. Media reports say that May’s sales rise was due to the fiscal stimulus package but then what about Apr’s rise ? Maybe they should interview our old friend Warren Buffett again on which US recession he is referring to.

He has also compare his fund to Warren Buffett’s Berkshire Hathaway share price several times [come on, all value investor know that share price doesn’t reflect intrinsic value!]

Is there a recession later? The answer is clear. But our beloved Tan Teng Boo can still find an excuse and blame it all on one cause – the collapsed of Lehman Brother [he termed it the “Lehman Panic”]. Yes, it might be the final cause, but it is not the only cause. As I have written an article on multiple cause and effect. Someone who died of lung cancer cannot just blame the cancer cells but forgot he has smoked 2 packs or Marlboro for 50 years.

When Tan Teng Boo recommends something, he tell you it’s good. But he never tell you what price it is good at. For example, he keeps telling people Parkson is “good” even it is near RM10 (it is RM5.60 now). His company ratings in his newsletter only have buy, hold or sell and seldom come with a price target. I think he learned his lesson as we are seeing more “price” guide in his newsletter. Although late is better than none, I believe many people lost trust to him this way [many of his public stock tips without price target went ugly].

I also can’t accept his call to buy his ICAP as long as it is not more than 10% premium to the NAV! This doesn’t goes well to the value investing philosophy. The most we can do is buy at NAV and never above the NAV. And preferably, we want to buy it at a discount (which means now). Why? Because price will either be above, at or below the NAV. It will trade around NAV and you know you make the most money (with the less risk) when you buy it below NAV because sooner or later, it will have period when it will trade below it’s NAV. On the other side, it means a lot if we can buy below NAV and sell it above NAV!

It will be quite sometime before the NAV of ICAP will close up to its NAV. But this is not worrying as long as you are a long term investor because it won’t eat up your cake with the performance fee like the Global Fund and the Australia Fund. You only pay 1.5% management fee and you can even buy it at significantly below it’s NAV now. Plus there are already many profits realized in the last few months after selling stocks like KLK and Astro which means either a large portion of the NAV is supported by cash or newly invested undervalue stocks.

Once upon a time my friend called Tan Teng Boo “blowing his own trumpet”.  I don’t understand what he means but I think I understand now. Which in Chinese means a florist will always tell you her flowers smell good. Nothing wrong with that. Just that you need to be aware of it. You still buy flowers from the florist but you got to pick the right flower yourself. Not all flowers by Tan Teng Boo smell good, but indeed, some are really really very good. You are the customer, you choose yourself. It’s his job to blow his trumpet because it is his business!

Remember, Tan Teng Boo is a brilliant investor and a brilliant florist.

Disclosure: None.

Related: Tan Teng Boo Responds to iCapital International Value Fund and Global Fund Performance Fee Issue