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. 
Disclosure: None.
Related: Tan Teng Boo Responds to iCapital International Value Fund and Global Fund Performance Fee Issue
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Hi Ah Yap,
Very much agree with what you wrote but don’t understand why you sold ICAP so as to `own specific stocks it owns (like HAIO and PADINI)’ because ICAP is holding those stocks and is selling at a discount, meaning you get those those stocks at a around say 18% discount to its quoted prices and without much monitoring of individual stocks, just allow ttb to do it.
I do understand your need for selling to go global tho.
So guess I won’t be seeing you at the AGM this year,lol.
Vested ICAP
Haha, this year I won’t be qualified for the AGM unless my mum proxy me. But won’t be going anyway. I manage some of my mum’s money and I have ICAP in it [and AXREIT bought at RM1!
].
ICAP owns lots of stocks. When you buy, you own all of them. I think TTB fall in love with some like Parkson which I don’t want to own and they have lots of it. Furthermore, individual stocks like HAIO, PADINI & BSTEAD pay a lot of dividends. It is happy to see money coming in. And there is no guarantee that close end fund must trade at it’s NAV. Most close end fund in the world trade below NAV for your reference.
Ah Yap,you’ve made a mistake on ICIVF.This is an extract from Section 7 of the PDS (http://cdal.com.au/files/media/icivf-pds.pdf)
The Performance Fee of 20.5% (inclusive of GST less RITC) is only payable if both of the following criteria are satisfied:
(a) the appreciation in the NAV at the end of the Performance Fee period when compared with the NAV at the beginning of the Performance Fee period is higher than the Performance Fee Hurdle Rate; and
(b) the NAV at the end of the Performance Fee period is higher than the Performance Fee Benchmark.
Please look at the example before making any false assessment.
first passage that i decided to skip in yap’s blog
(im still a student with no extra money to invest and in the wrong place too)
@Boyboycute, I hope you can take your time try to understand it because the reason I have to write it so long is because it is not obvious what’s wrong!!! You got to understand every keyword like “hurdle rate” and “performance fee benchmark”.
If they meet the 2 criterias, they can charged the performance fee. But based on which portion of “profit”? It is based on the the portion above the “hurdle rate” and not the “performance fee benchmark”. While the performance fee benchmark is 6% compounded, the hurdle rate is 6% above last year NAV!
So if last year NAV is very depressed, a large portion of the profit is subjected to performance fee! I have illustrated this clearly in my calculation above which happens to the ICGF in 2009. Fat performance fee is charged. What is more real than real money gone?
The problem is again, they are not using the benchmark as high water mark but just the flaw hurdle rate!
— — —
20.5% of performance above the Performance Fee Hurdle Rate (inclusive of GST less RITC), but the performance fee is only payable if the annualised performance for the period is greater than 6% p.a. on a compound basis from the end of the Initial Offer Period (Performance Fee Benchmark). Calculated and accrued monthly and paid annually.
Definition: Performance Fee Hurdle Rate = 6% p.a.
Would like to share some of feelings with you. I started to follow your blog early this year, and I must admit that I do like almost every single of your blog, like the way you write and describe things. However, the one that let me down a bit was how much you look up to Mr Tan TB (from the older post about him). I cant explain how grateful I am to read this new blog from you, it’s good that the truth finally revealed to you. I read your TTB’s blog before I went to meet him in person for interview in his company, by reading your blog, I do have high expectation about this “brilliant” man. However, I could only say after the interview – I just feel so disappointed. You are right by saying his characther is something you need to monitor, my only feeling after the interview was – people out there who never get to talk to him in person would never know what kind of person he is deep inside. If you are interested to feel more of what I’m trying to say, I would suggest you to apply to his company, get to meet him for the interview, I’m sure you will be enlightened. The main reason I wrote this email is I do enjoy reading your blog, and I’m sure there is more people out there who feel the same as me, hence would hope that they have a better and true view of this man.
@True Viewer, let’s see if we have the same observation. My observation about him is that he try to look “humble” outside but is actually quite “sombong” inside. While I didn’t interview him before, I have heard him speak in many places like ICAP AGM and I wonder why every time he use that kind of “look funny but not funny” way to answer people questions. For example, someone ask him why he don’t invest in banks, he answered like, “Because I am not as good as you, so I don’t invest in banks.” There is a feeling of personal insult to that. He always give people a feeling that, “You don’t like my way of invest, you invest yourself. It will be your lost.”. And someone ask him about the intrinsic value of Berkshire Harthaway and he answer like, “Go ask him [warren buffet] yourself, why ask me?” But hey, you keep comparing yourself to Buffett in the newsletter and yet you answer that way … While he don’t like Dr M, I think some part of him look like Dr M. He is always right, you must agree with him.
Yap, I realized you don’t have any post on Forex trading…For those of us (including you) who wants to achieve financial independence, I believe we want to know all the investment vehicles available to us, the GOOD ones (stocks, options, futures, forex, commodities, CFDs, mutual funds, hedge funds, warrants) AND the BAD ones (structured products, fixed deposits, foreign currency fixed deposits, bonds, insurance savings plan, accumulators, super track notes, reverse convertibles).
indeed, over sarcastically, but he find himself funny. Moreover, he claimed himself to be open and willing to accept criticism, but i dun see any of the “openness” in him
@A.J Wellesley, :p I know nothing about forex. I am heavily sided to value investing. I do trade values, but I don’t trade “technical”. I think forex is very difficult to master. I have trade options of 2 years for nothing. It’s like having a busy job that don’t have a salary.
@True Viewer, exactly! You explain it better than me in 2 sentences.
Hi Yap,
I have read about your previous blog about TTB and was not agreeable to your high regard for him but I just let it be. Just like a previous poster/reply, I am relieved that you begin to question this man. From my reading of some of his writings especially in the Star column, this man is too full of himself. He has shown no class at all. Very atypical of Chinese value of humility. In contrast, if you read Buffett and listen to his interviews, you can feel the GREATNESS and humility of this most successful investor on earth. And his words of wisdom is second to none. He practises what he preaches. I have read many times about how this TTB always criticise Buffett. Is TTB even in the same league????? TTB once proclaimed himself as the world’s Top 5 fund manager. OMG! This guy’s ego is surreal. So thick skin!
And thanks for pointing out the flaws in the GF and AF. If what u pointed out is true, it is daylight robbery!
If Tan Teng Boo can perform well and maintain compounding return of more than 6% in long term,I agree to pay him and his team the performance fee.They are making me rich!
The effective total fee charged is still low compared to other international funds.
If you pay peanuts,you get monkeys!
@Boyboycute, please read again, you are missing what I want to say. If you think paying them 15% fee is peanut and getting 17% in 2.5 years is monkeys, go ahead. Let’s say the fund is worth USD400 million before fee in December 2009. They take away USD40 million from it as fee. And funny enough, I guess they won’t have enough cash to pay it because they are 95% invested so they have to liquidate stocks. Let’s wait for the financial report (which come out very very late). Think again, Warren Buffet old time partnership and Mohnish Pabrai currrent fund all have high water mark to protect investor and will never double charged them. BTW, 6% compounded won’t make you rich.
@Constantine, good observation and I am happy I am not the one “something wrong” here. He also keep on bragging that he is the first Asian fund manager to go Global. Haha. Regarding GF, they have already robbed 10% of the fund in Jan 2010 after charging the performance fee for 2009. He also has a tendency to delay the bad news and speed up the good news. When his fund NAV go up, he will announce it very early like first 10 days. If it perform badly, he will announce it end of the month after 20+ days. I think he delay the announcement of his scary after fee December NAV for more than 2 months! Since he updates his NAV every week on his “iCapital Gems” section, so you can check to see how this is play out. BTW, most fund provide quarterly report 1 to 2 months after the quarter but if you check, they are like providing one 6-9 months later. It is like reading something very outdated.
Well, been reading all comments here and was thinking from ICAP’s perpective. We all want people to be nice and humble but sometimes they are not and we can’t change that. In ttb’s case, he might be an asshole but we’re not paying him to be nice and humble, we’re paying him for results, if he delivers and makes us richer then whats the complain!! I’m not defending ttb’s character, but lets look at it from an investment point of view. Like Ah Yap puts it `Remember, Tan Teng Boo is a brilliant investor and a brilliant florist.’, isn’t that the bottom line for us investors.
Many people don’t like Mourinho but he gets the results and if he were to coach your team, would you welcome that, cause you just know he’s going to get you the result by hook or by crook unless you want a nice and humble coach.
I have gone through the things that Ah Yap mentioned and find that Ah Yap is indeed right in saying there is a flaw in the calculation method which indeed favours TTB unfairly. In my knowledge, this is the first time I have come across such calculation method. The performance fee method of 20% is used in the hedge fund industry. However, it is only charged on any performance above the the “high watermark” so that there is no double charge or over charge. BUT this is not the case in TTB fund. Example: if TTB achieve compounded average return of 3 years of 6%, NAV at the end of 3rd year is 1.19. So you think TTB should not charge any performance fee? Yes, he will not charge if every year he earns 6% consistently for 3 years. But what if first year he earns 5%, then 2nd year he lost 60% and then 3rd year he earns 185%? NAV 1st year is 1.05, NAV 2nd year is 0.42, NAV 3rd year is 1.197. In this case, you know how much performance fee you have to pay eventhough the fund did not fare much better compared to the first example? You have to pay 20% of 1.197 – (0.42*1.06) = 0.15. You have just been “conned” of 15% performance fee. This method of calculation encourage the fund manager to make his fund returns swing up and down! He can charge most if the fund lose 90% in a year and then make 500% the next year! woo hoo…..If you want to reward your fund manager 15% or MORE for making compounded return of LESS than 6%(after fees), GO AHEAD! After a few years of volatile performance, a big portion of the NAV might end up in TTB’s pocket. No joke.
I think Constantine explained it clearer than me in less words. It depends on how you get there. Let’s say if the Australia Fund go down to 90 cents this year which is quite possible swing (10%, Nasdad dropped 3% yesterday) and next year it goes back up to RM1.20 which is highly possible too, what do you pay? You pay based on 0.90, not 1.00. The metaphor is, if 1 of your tyre is “puncit’ and you go to the mechanic to fix it. He pokes a hole in the other 2 tyres and charge you for replacing 3 tyres! Do you think this is fair? When the fund goes from 0.90 to 1.00, it is not called performance, it is called recovery. You can’t dig a hole yourself and climb back up and be proud of yourself. UNLESS you are paying investor under-performance fee, did TTB do so? But he doesn’t need to, so “head he wins, tails he doesn’t lose much, head again, he wins very big”. A performance is charged to your original principal! Not simply the profit. They are eating your cake.
I have been asking them this question long time ago in the mid of 2009 (I even asked them while I am in ICAP AGM). They refused to answer my question (I think because they know there is a flaw) but there is enough time for them to fix it (changing the memorandum)! They even told me they are in the process of changing it. But they didn’t. Even until today, they still didn’t change it. Where is the integrity?
Most performance fee based hedge fund have high water mark that protects everything it has archived. So if it makes 70% in 1 yer and charged a fat performance fee, it can no longer charge anything below that performances. A good example is Pabrai which he needs to climb back very high before he can charge anything. Pabrai always tell their new investor that they can ride for free up to the high water mark without paying any performance fee. That’s integrity. On the other way round, what TTB need to achieve is simply a 6% compounded return which even Amanah Saham has no problem archiving (sub standard). And again, the problem is, it is not “high water mark”, it is merely a “benchmark”. It never protects your principal and your old profit which has been charged a performance fee on. It is TTB fund that charge performance fee based on year over year performance, i.e. they can poke your good tyres and charge you for it (and brag about it).
Again, they have a chance to admit the mistake and fix it, but they didn’t. Where is the integrity? Since they are the florist, they also didn’t explain the scenario the way I did in their newsletter. They say:-
83.90%? They didn’t tell you how deep the hole they dug before this. They indeed exceeded the 2 tough hurdles, but it didn’t gone way above 2007 NAV (17% return for 2.5 years?). They also mislead you into thinking the hurdles as “high water mark” in the last sentence. It didn’t because the performance fee is based on last year mediocre performance. Everything looks good with the low base effect because before this everything sucks. They didn’t tell you that they have since charged 15% performance fee while delivering 17% to you. That is almost a 50% profit sharing. And last, they are honest that it is a “unique” water mark that didn’t protect your profit and your principle.
My tone seems a bit strong, I am being “gik” by poslaju lousy service right now because they can’t deliver parcels to my house properly for so many times.
I think if you ask TTB again in the upcoming AGM of ICAP,they will probably ask the security to drag you out.Actually,investors of its international funds know about the performance fee calculation.When Pak Lah shelfed the capital control,a lot of local investors want to diversify their $$$ to overseas.They know RM is going down the drain in long term.They don’t really care about the fee charged as long their capital is growing @ 6% pa.But TTB is smart to identify the demand and capitalized on it.TTB is also good (cheap) at using one professional team to manage two funds and charged two management fee separately.Did you notice that the portfolio of both funds are very identical?If ICIVF mirrors ICGF,then the fee charged in ICIVF should be lower than ICGF.
ICAP is at very good position to make huge profit in May correction.Read my blog for info.
Hi Ah Yap,
Although the fund’s performance in the past 2.5 year makes GF and AF performance fees rules look unfair, we must be aware that last year’s market swings are an anomaly (severe recessions happen once every 10-15 years). In most years, a fund’s performance is incremental +/- and these performance fee rules are justified.
Also, we must remember that good decisions were made last year (continue investing despite recession) that allowed GF appreciate so much when the markets recovered last year. Note that many other fund managers stayed out of the market last year and missed the largest bull-run in recent history.
Just my view on the matter..
Global Fund April NAV released: $1,119.74. A drop of 6% from previous month. No under performance fee are required to be paid by the fund manager.
As an investor, your money is invested and so volatility affects your money. On the other hands, fund manager fees are charged and once in their pocket, is in their pocket.
So now initial investor returns is a mediocre 12% (will still go up and down) but safe returns to the fund manager in their pocket now is 15% for 2 years 10 months. The fund manager makes more money than the investor who put out the money!
If say the NAV ends at $1,000 again this year and rise up to 1,300 next year (market always goes up and down!). You will have to pay hefty performance fee again for them to “climb back up the hole they dig”.
If you still don’t get it, I am not against performance fee. But performance fee can only be charged when a fund perform. And it must protect investor’s money by setting a high water mark where performance fee can no longer be charged on the portion that has been charged before! No matter how often/seldom a market correction happen, investor capital must be protected, because sooner or later, it will happen. It’s about integrity.
[Can a doctor stab you, operate you and then charge you, stab you again, and then operate and charge you again, then stab you again, can charge you again?]
Another problem with the funds that I have mentioned is also clearly illustrated now. If you want to sell your fund, you can only do it 4 times a year [Mar, June, Sep, Dec]. You also need to do it 2 months in advance [easy to get in, difficult to get out].
Now if you want to sell in June exit point, you will have to do it end of April (2 months in advance), with the market behaving like this now, I really don’t know how you can sleep well for this 2 months. You can’t cancel your sell order, and you will need to wait until beginning of July to know what is your selling price!
Let’s say the market correct further and you manage to sell in June at $1,000 [10% fluctuation is very normal], that means after investing for 3 years with them, your return is 0% while the fund manager return via fees is 15%+.
i thought they are looking to waive the performance fee or made some adjustment to it?
Global Fund May NAV is $1,019.62. What does it means? It means investor make $19.62 or 1.9% for the last 3 years while the fund manager has since charged 15%+ of fees. Most fee are called “performance fee”, performance of 1.9% for 3 years! 15% fee! Without the fee, the fund would have worth $1,150+ today. But the $150+ has been pocketed by someone safely.
Technically you can’t sell at May, you can only sell 4 times a year end of each quarter, so you can sell at June. But you got to submit you redemption notice 2 month earlier (end of April). So now, if someone has submitted it, how does he sleep? If he is an early investor for 3 years, what do he get after paying someone $150+ performance fee per share? Zero, nada, nil. Long term investor are being punished.
And if 2010 ends the NAV at $1,000 (anything can happen, above 1,000, below 1,000, this is stock market), and in 2011 the fund recover to $1,300, it meets the criteria to charge the performance fee again, for the 3rd time on the same “profit” portion! $1,300 = 30% return, -6% = 24%. You will be charged 20% of the 24%, which is 4.8%. So at 2011, investor will get 25% for 4.5 years while the fund manager get 20%+. The fund performs and makes money for the fund manager, not you. You bear all the risk and ride the roller coaster, if you exit at the wrong time, you may be worse.
The Australia fund NAV is $0.9201, down 8% since inception, poorer than all major index by a big margin. If year end it is still the same, no “underperformance” fee will be charged to the fund manager. BUT heck, if the fund recover from $0.9201 to $1.160, wakaka, you got to pay the performance based on the “profit” of 1.16 – 0.92 = .24!!! You need to pay performance fee for that 8% gain from $0.9201 to $1. Isn’t that your initial capital? Can a doctor whacked your head, make you bleed, than treat you and charge you for the “treatment”? He cause you the injury, give you pain, and still can charge you fee?
I am trying to help you guys see. If you don’t like or agree with what I say, stick with your own conviction, this is a free world.
Do they mention anything about high water mark? If they are launching the product and operate it like a hedge fund, i believe they can only charge performance fee under high watermark arrangement.
Correct me if i am wrong..
Yr1: NAV 1.01
Yr2: NAV 0.9
Yr3: NAV 1.01 -> cant charge performance fee as it has yet to surpass the high watermark.
My Stock Idea
Cannot charge if year 3 NAV is $1.01. Year 3 must be above $1.06^3 = $1.19 before they can charge. If year 3 is $1.20, you will need to pay for “performance” from $0.90 to $1.20. The $1.19 mark will not serve as high water mark, it is just a criteria.
$1.20 from $0.90 is 33.3%, minus 6% = 27.3%, you pay 20% of 27.3% = 5.46%, 5.46% of $0.90 = $0.049, so ending NAV after performance fee will be $1.20 – $0.049 = $1.151. The key discussion here is, the 6% compounded return only serve as hurdle rate and not high water mark when calculating the fee. And the fund manage can even charge performance fee on initial capital, i.e. the portion from $0.90 to $1.00.
If the 6% compounded rate would have served as high water mark, the fee would be 20% of the $0.01 which is just 0.2 cents. 3 years for 20% return is mediocre and letting the investor keep most of the profits is more suitable (instead of taking 5 cents out from it and left 15% to the investor).
Even if we use standard hedge fund high water mark calculation on previous high of $1.01, the portion of $1.01 x 1.06 = $1.071 is untouchable. So at $1.20, only 20% of $1.20 – $1.071 is subject to performance fee. So the fee is 2.68 cent (as compared to current 5 cent). After fee NAV would be $1.1742. And the most important thing is, after this, the fund has to go beyond 1.20 x 1.06 = $1.27 before they can charge any fee.
But now if the fund move furiously up and down for the next few years, say, drop to $0.90 again Yr4 and rise up to 1 cent above 1.06^5 = $1.33, you need to pay 20% again from 0.90 to $1.33. Performance fee will be 7.52 cents. Ending NAV will be $1.255. 25% return in 5 years after lots of fee charged. After 5 years, early investors get 25.5 cents, fund manager gets 12.5 cents.
In standard hedge fund scenario, only portion above $1.27 can be charged a fee. So the fee for standard hedge fund is 1.2 cents, not 7.52 cents!
p/s another thing is even if the fund rise continuously from year to year. If a fee is charged to $1,300 bringing it down to $1,250 the previous year, and when it hit $1,400 next year, they will use the $1,250 for profit calculation, not the $1,300.
Hi,
totally agree with you. Withdrew my fund on realising the way they calculate the out performance. Instead of working on the benchmark of 6% viz 1180 base at 3 years and then subtracting the Nav and multiplying by 20% for performance they have done what you did. Did not want to argue only thing is the way they have interpreted what is written.
ted
Everyone is worry about the fund’s performance fee.
Min investment is AUD20k. If you’re not an inexperienced investor, it’s better for you to invest under professional fund manager. Focus on your daily work and let’s fund manager work for you.
The fee is not really too much. Let’s fund manager earn, you hard work on your business/work, throw more $$$ into market to make more sense.
I invested in some hedge fund, which is located in Hong Kong. I have less worry on daily stock decision. Let’s fund manager work for me. If they’re not perform better than market, then we should FIRE them -> Withdraw the fund. That’s all we can do as investor.
Constantine, you talked as if TTB is a magician. Things you said only make theoretical sense but when it comes to the real world, I am sorry to tell you that you just have to realize that if a fund manager can manipulate the up and down in his fund, we would call him a God. The hard truth is, at every point in time, we won’t know what is happening next.
Taking the example you provided:
NAV 1st year is 1.05, NAV 2nd year is 0.42, NAV 3rd year is 1.197.
From historical record, the only time that TTB’s fund falls by a big percentage is when the overall market is down by almost at least the same magnitude. That means, on average, the majority of the people out there is losing a big amount of money. However, recovering is a matter of skills already. If you can recover the same amazing percentage by yourself, why bother investing in a fund? You should be investing yourself, or maybe even starting up a fund yourself if you are that good! What people don’t realize is the big leap from the huge fall only happens when you are good and skillful enough. Since you would have done worse had you not invested in his fund, therefore it makes perfect sense for him to charge you for recovering your money from that market bottom.
Please do realize that the 6% hurdle rate bears the same concept as the high water mark.
OK. High Performance fee is because fund manager work for you if you always busy and no time to care about stock market.
You have to pay someone to manage for you if you’re busy with your biz/work. Don’t calculate too much. Earn as much as you can to invest.
You need huge capital to invest oversea.
@Alaska,
I think you did not get the points that are being presented. Imagine you are riding a cab from KLCC to Bintang Walk. Halfway through, the cab driver lost his way and he drive around to get back to KLCC. Then, on second try, only he manage to get to Bintang Walk. Do you pay the cab driver twice for making the same trip twice?
Hurdle rate and high water mark is a totally different concept. Hurdle rate is for fund manager to hit a certain reasonable performance in order for him to charge fees. High water mark is there to ensure that he did not charge the same fees twice that is, the portion that he has charge should not be charge again. The high water mark is there, in a sense to ensure that the fund manager do not take excessive risk to achieve the returns, because, if the fund fall in price, he would not be able to charge performance fees again on that portion. So, there is no point for him to take excessive risks and get the return.
If there is no high water mark, TTB can technically invest in a highly illiquid stock, push it up then wait for others to push the stock up further. Then, dump some share to make the price falls, push it up again to meet the hurdle rate, dump some share to make the price falls and repeat the process to charge fees.
Hurdle rate is like the bonus payment for the cab driver to reach Bintang Walk in 5 minutes. High water mark is there to ensure that the driver do not drive around and charge you more.
BTW, Ah Yap, if you are able to read this, Happy CNY to you.
Thanks for the post Yap — although you sure sound like a recovering alcoholic! -e.
I guess, those small fish care too much on performance fee. For serious and high capital investor, they care about performance, not fee.
Small fish, kira too much… If kira too much, invest yourself. Learn lesson from your mistake. That’s all i can say.
Thanks.
Performance fees charged calculated based on previous year’s NAV minus with this year’s NAV, is obvious for this 2008-2009 case, but what about if years to come (if) GF rise well ahead of 6% compounded, if we calculated performance fees based on hurdle rate minus with this year’s NAV, THAT would be a HUGE SUM.
Eg 2030 GF USD5 – 2031 GF USD 6 = performance fees is USD1×0.2=USD0.20.
But based on your’s proposal
Eg 2031 GF USD 6 – compounded 6% targeted (after 18 yrs) USD 2.85 = USD 0.63. The higher GF rise, the higher the amount.
I think performance fees calculate is fair – but of course if you ask him, better TTB have stake in GF (just like Warren Buffett), and no performance fees charged. He earn thru TTB investment in GF. Anything is managing a GF is expensive.
The principle is you cannot charge performance fee on portion that you have already charged a performance fee. So you must either use the hurdle rate or previous high water mark, whichever higher as long as you already charge a fee on that performance. You simply cannot use previous year closing. Just like taxi driver, you don’t want to pay him double just because he waste your time and circle around.
Hey there! Nice and informative blog! I was wondering how do you obtain the list of stocks currently owned by TTB funds? I tried to look from the website but seems that I will need to pay subscribtion fee to get access to their portfolio??