Tan Teng Boo’s i Capital Global Fund & i Capital International Value Fund Review (And An Update to ICAP)
Apr 29th, 2010 by AhYap
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.