In normal listed companies, one would look at forecasted earnings or growth and use P/E, ROCE, dividend yield or discounted cash flow to derive fair value. Below enclose with my own fundamental research upon ICAP base on its annual reports.
However, I do not think the abovementioned methods are appropriate methods to evaluate the fair valuation of ICAP. The earnings that we normally read from the annual report do not reveal the up to date information about the valuation of ICAP’s portfolio. To value ICAP, an investor should look at its net asset value (“NAV”) which is mark-to-market. If ICAP did a good job with excellent stock picks, eventually its NAV will be higher than its accounting value or the so-called net asset value. ICAP updates its NAV every Thursday at the announcement section of Bursa Malaysia.
Hence, the market price of ICAP should keep track to the NAV. If NAV was RM2, the market price should be traded at RM2 as well. As we know the market sentiment can vary from fundamental, the market price of ICAP will probably diverge from its NAV. It could be traded either above (in premium) or below (in discount) its NAV. By taking the advantage of this unique feature to trade in premium or discount to its NAV, we can outperform ICAP’s return. Effectively we can claim that our return is better than the return that TTB has achieved. How?
Assume that ICAP is able to double its fund size in 5 years since its listing. So its NAV raised from RM1 to RM2 of which indicates a return CAGR of 15% (= [RM2/RM1]^[1/5] – 1). As we know ICAP was listed at a mild bear market, so its share price could be traded in discount at RM0.90, which is 10% discount to its NAV during its 1st day of listing. After 5 years, the share market is in a bull run and instead of trading at RM2 on par to its NAV after 5 years, ICAP is traded 20% in premium at RM2.40. As an investor of ICAP, we can take the advantage to acquire ICAP shares in discount and dispose ICAP shares in premium and reward ourselves a handsome CAGR return at 22% (= [RM2.4/0.9]^[1/5] – 1), which is better than the return of 15% that achieved by TTB! This is the reason I mentioned in the previous thread that I will acquire additional ICAP shares whenever its share price is traded in discount to its NAV.
Furthermore, not to forget that ICAP is a CEF that adopts value investing. In other words, the shares that it holds are already at a discount to their long-term values. So when the market price of ICAP is traded in discount to its NAV, this means investors are getting a second level of discount.
For ICAP, there are few more added safety attractions as ICAP is not allowed to engage into derivatives and short-selling. In addition, ICAP is a conservative fund that no borrowing is allowed unless the fund is permitted by the shareholders. Just look at the number of hedge funds which are over leveraged and have recently gone bust, we should just sleep soundly by investing into ICAP.
Finally, at a NAV at RM1.86, ICAP is able to achieve a CAGR of 18% (= [RM1.86/RM1]^[1/3.75] - 1) which is greatly outperformed as compare to the benchmark KLCI index (KLCI index is performed poorly since last 3.75 years which only gained a CAGR of 6%). Below shows the rise in the NAV of ICAP versus KLCI index.
In a conclusion, we should prove to ourselves that serious long term value investing on KLCI does work and it is now a good time to invest into ICAP as it is market price is traded in discount of at RM1.79 (its NAV is RM1.86 according to last week announcement, so you are getting a discount of 3.8% if you buy ICAP now). Switch your unit trust funds to buy ICAP, attend its AGM and grow your wealth together with ICAP, this is all what I can advise to my friends and relatives.
This is my first time to speculate a stock. Maybe more appropriate to say that it is more like a trading. As I refer to ICAP's technical analysis ("TA") announced last Friday that the share price is on the verge of moving upwards with a target price at RM5.70 (according to my observation upon ICAP's TA recommendation which could be realised within 2 weeks to 1 month period).
As a result, I decided to put a little money to test whether ICAP's TA is as accurate as its fundamental analysis. I have bought Parkson at last Monday (20-July-2009) with a cost price of RM5.1 for 1,000 units. My target price is as suggested by ICAP at RM5.70 (this indicates an internal rate of return at around 10%). And I have set a 5% cut loss point at RM4.85.
Last Friday I noticed Supermax had posted its 2nd quarter result for FYI 2009. I was surprised that Supermax was able to complete filing its 2nd quarter result which was just ended 2 weeks ago at 30 June. I told myself it must be some good result from the quarterly result so the company would like to announce it as soon as possible. When I took a glance on the annoucement, I immediately realised that the net profit of the 2nd quarter was almost double the size of the net profit on y-o-y basis. The net profit of 2nd quarter also grown at a pace of 31% as compared to the preceding quarter. By achieving a net profit of RM25.7 million, it has far exceeded my original expectation on the net profit of the 2nd quarter should be around RM21 million to RM22 million. So I further calculate some relative ratios and comparing the forward P/E of Supermax to other glove companies that listed at Bursa Malaysia. The following information indicates the annualised forward P/E ratios of the 4 main glove companies that listed at Bursa Malaysia:- Top Glove -> 12.67 times Kossan -> 11.17 times Harta -> 8.79 times Supermax -> 5.04 times According to the comparison that I have done, it is concluded that Supermax was far cheaper than other 3 glove companies in terms of relative valuations. Since it has spin off APLI and trying to reduce debts and also able to achieve a better net profit margin (which stood at around 14% at the latest quarter), I believe the cost of capital to Supermax should be lower now and thus increasing its P/E ratio. Unless there is a situation to justify Supermax with lower P/E if its sales growth rate was lower to the peers, and apparently it is not the case. If Supermax’s P/E ratio should be at least parallel to Harta’s P/E at 8.79 times, not mentioning if it should be valued as high as Top Glove at 12.67 times, its share price should be at least RM3.45 (= RM1.96 * 8.79/5.04). The closing share price of Supermax’s at last Friday was RM1.96. According to my estimation, Supermax is underestimated by 44% (=[3.45 – 1.96]/3.45), or put it another way to say that it will have a chance to appreciate up to 76% (=[3.45 – 1.96]/1.96). In view of the above information, I decided to acquire additional Supermax’s shares yesterday. I tried to bid the shares at RM1.96 but I was informed by the broker that the share price was push up until RM2.1 since the market open at 9 a.m. It is not surprised to see that there were such a huge demand for Supermax’s shares, so I revised my bid price to RM2.1 and I was able to close the deal with 7,600 units of Supermax’s shares.
After investing into ICAP, I have further involved into ICAP by subscribing its affiliate magazine “i Capital” and attending ICAP’s annual general meeting (“AGM”). There were several significant points that I learnt from ICAP after investing its shares which reinforce my understanding how the fund is functioning. The fund is encouraging its shareowners to hold the shares with a long-term basis.
In order to encourage investors to be long term shareowners for a fund, the fund can impose several restrictions to the fund such as 1-year lock in period, 2-month disposing notification period and close-end units. So ICAP decided to setup the fund with a close-end basis. The subsequent paragraphs I would like to differentiate what is a close-end fund (“CEF”) and its different to an open-end fund (“OEF”).
A CEF is set up as a company under the Companies Act and is generally listed on a stock exchange. CEF has a fixed number of shares outstanding and its capital is raised through an initial public offering (“IPO”) like any other public offerings. Investors who buy the shares of a CEF will become shareholders of the company. Like all other publicly traded securities, shares of a CEF are bought and sold in the open market. Its share price is determined by supply and demand in the marketplace.
Whereby the OEF, or more commonly in Malaysia it is so-called the Unit trust funds (or in the US it is mutual funds) which is not incorporated as a company but as a trust where monies are collected from investors to be invested and managed for investors' benefits. OEF’s units are first offered through an IPO. However, OEF units will vary even after the IPO. As the unit holders of OEF are still able to buy or sell theirs from/to the OEF, and the OEF is responsible to issue new units for buyers and cancel its existing units to liquidate cash in order to meet the unit holder’s redemption. Sometimes, some of the fund mangers of certain OEFs claimed that their fund size have increased a lot during a short period, however please take note that the increase of the fund size not necessary because of the fund manager’s ability to achieve superior return but just merely indicates that there are more units being issued.
In view of the abovementioned difference in between CEF and OEF, I would like to point out the one of the most important advantages that CEF consists is the professionalism of fund manager is retained much better than OEF.
Why we want to invest a trust fund? The most common pitch used by trust fund is that it allows the man in the street to enjoy professional fund management. However, due to the open-end structure of an OEF, the investment decision making is indirectly made by the retail investors, not the professional fund manager. Investors themselves end up being the one controlling the buying and selling of the fund's portfolio, not the fund manager.
When the stock market is bullish, investors tend to flood new monies into OEFs. When this happens, the OEF receives an inflow of cash and needs to invest the monies received based on their investment mandate. Thus, investors are 'forcing' the fund managers to invest, even when some of the shares are trading at high valuation. In a bear market, investors tend to panic and start to redeem or sell their units. Fund managers of the OEF have no choice but to liquidate their portfolio to raise cash to pay the investors who sold or redeemed their units. Thus, investors 'forced' fund managers to sell when the stocks may be trading at attractive valuation. Once the fund managers are ‘forced sell’ the stocks, it will trigger another round of market crashing and investors will be more panic and selling/redeem more units. So it is just a circle of market crashing, panic, selling and market crashing again. In short, the fund managers of OEF are dictated by the emotions of unit holders who are tend to be more in short-term tenure, and thus eliminating the benefits of professional management and long-term investing.
On the other hand, the buying or selling activities of the unit holders of CEF will not affect the investment decision of the fund manager once it is after the IPO. If any potential investors would like to buy the CEF’s units or any existing investors would like to dispose the CEF’s units after IPO, they can trade to buy/sell the CEF’s units at the secondary securities market such as BursaMalaysia, and the CEF is not responsible to any of these trading activities. This is the reason why CEF is required to be listed at a secondary market for the ease of trading the units. Thus, the fund manager of CEF can efficiently utilise the proceeds from the investors for long term investing and buy more units during bear market with cheaper valuation and selling more units during bull market with higher valuation without disturbances from the trading activities carry by the unit holders. This is one of the reasons that CEF can outperform OEF in term of investment return.
I have read an analogy of God playing a chess game and humans having occasional looks at the state of the board, and trying to figure out the rules. It is quoted from the late Nobel Prize-winning physicist Richard P. Feynman when he was trying to explain the fundamental laws of nature:-
“The Universe is like a huge game of chess and the scientists and mathematicians who are trying to work out the rules only get to look at a little corner of the game. We do not know what the rules of the game are; all we are allowed to do is to watch the playing. Of course, if we watch long enough, we may eventually catch on to a few of the rules. Even if we know every rule, however, what we really can explain in terms of those rules are very limited, because almost all situations are so enormously complicated that we cannot follow the plays of the game using the rules, much less tell what is going to happen next. We must, therefore, limit ourselves to the more basic question of the rules of the game. If we know the rules, we consider that we ‘understand’ the world.”
After reading this analogy, I was thinking is my destiny being part of God’s game? Is my way of life or someone who I met in my life was thought to be decided beforehand by fate? Can I predict my destiny using a particular form of formula?
Just like what Feynman described that initially, we thought there is no such rules exist because the whole universe is just a big lie, it is just repeating to randomly cause thing as it happens as God plays fast and loose, we cannot discern the pattern in the complexities of the game. If there was no rule and theorem, do we need scientists and mathematicians anymore? Maybe we will find our life of destiny is nonsensical and we should wish it to end as soon as possible. Life is just a waste of time.
Of course, if we watch long enough, we may eventually catch on to a few of the rules, or trying to assume what is the beauty of the rules. We believe the rules do exist as we see the universe the way it is because we exist, we are here because of the rules and the narrow range of possibilities for our being here are not coincidental. But once we are able to notice the conserved rule, we may look away, our attention may be deflected by the rich diversity of the universe. Nevertheless, when we look back at the game of this rules are unchanged.
Am I right to assume there are rules guiding me on the way to the destiny now? Then where are the rules now? Maybe I should think again the question: ‘Who am I’?
I always encourage my family, relatives and friends start to invest as early as possible. However, I use to advise them to do their own research on the particular investment they would like to involve, and I do not like to recommend which company is good to buy. It is because a particular company could be sound good to me, it might not be suitable to others due to their different risk profile, investment objective and needs.
However, there is an exception that I strongly recommend, i.e. iCapital.biz Berhad (ICAP, 5108) which is currently listed at the main board of BursaMalaysia. What is so special in ICAP? Let me 1st introduce some of its background and history, and most importantly its fund manager, Tan Teng Boo.
I first came through to this fund when I was working at an Investment Bank, as I was researching the recent new Initial Public Offering ("IPO") in BursaMalaysia at the moment. So I found ICAP that was going to be listed at October 2005. It listed as a closed-end fund at the main board of BursaMalaysia since then and its IPO issue price was RM1 per share with 140 million units. So the fund size was RM140 million at the initiation period of the fund. I first invested into ICAP was the 1st day of its listing at Bursa Malaysia at a market price of RM1 and am currently still accumulating its shares whenever its net asset value ("NAV") is higher than its market price.
There were 3 points attracting me to buy the fund at the time it was first listed and I will list the points 1 by 1 in detail. The 1st reason was the fund's aim to increase its NAV from RM140 million to RM280 million by year 2010, so it targeted that the fund manager will double the fund size within 5 years. In order to double the fund size in 5 years, it means that it would need a compounded annual growth rate ("CAGR") of 14.87% (= 2^(1/5) - 1).
Though a CAGR of roughly 15% is not the most impressive return that I have ever met, I would still consider it is a very good return to a moderate person. I believed most of the fund in Malaysia does not possess this kind of return. Indeed, ICAP was able to achieve to reach its target fund size at peak RM300 million at December 2007. However, the subsequent market crash sent the fund's NAV to a lower point at RM1.81 according to the latest weekly announcement at Bursa Malaysia yesterday (so its latest fund size would be now = RM1.81 * 140 mil units = RM253.4 mil). So it has 1 more year to go to achieve its target.
How to achieve a CAGR of 15%? This is the 2nd point I get from the fund manager of ICAP, Tan Teng Boo ("TTB"). Basically, when investing into ICAP, one is effectively employing TTB to manage fund for you. Same like Warren Buffett who runs Berkshire Hathaway, it is a one-man show. Let me share my experience of meeting with TTB. I remembered that before I first subscribe ICAP shares at Oct 2005, I was trying to 'subscribe' an analyst job from Capital Dynamics, the fund managing company of ICAP.
It was a group interview and the interviewer was the chief executive officer ("CEO") of Capital Dynamics. Of course, the CEO was TTB. TTB asked the candidates (including me) at the group interview a question that "What would be crude oil price in the next few years?". Maybe most of us cannot get a right answer (too sad that I was incapable to answer the question correctly, I failed to be shortlisted..>_<), so TTB told his view upon the crude oil price that it would be move along with the demand. Although at the moment the crude oil price was barely less than USD60 per barrel at year 2005, TTB predicted that the crude oil price can shoot up to USD100 to USD140 per barrel at next 3 to 4 years. As he mentioned that nowadays most of the developing countries are progressing fine, especially the 2 great giants China and India. So the world economy is gradually decoupling from the US economy and thus the economic growth engines are diversifying more onto other countries. Without having economic slowdown on those developing countries, there is no reason for the limited crude oil not to increase in price, it is just a matter of time.
Though looking back at what he had predicted at year 2005 on the crude oil price of which started to shot up to a peak at USD140, it seems that TTB was acting like a prophet. Actually it is his investment philosophy that making him right all the times and bringing an excellent result for the fund. TTB is a follower of the legendary father of Value Investing Benjamin Graham, just like most other successful investors such as Warren Buffet. However, TTB is not just merely a value investor that searching deep into companies, he has his own style of investing strategy, i.e. economic analysis + company analysis (Top Down Approach).
TTB called this top-down value investing philosophy as "Intelligently Eclectic". As TTB differentiate his own "Intelligently Eclectic" value investing philosophy from the conventional value investing. He first started to analyse at a bigger extend field of macroeconomics such as economies and stock markets, interest and inflation rates, bonds and commodity markets, market psychology, in addition to the local environment before arriving his advice and recommendations to a particular company or its stocks. Nonetheless, he still strictly follow the value investing approach on the stock selection by comparing divergences between market prices and the underlying intrinsic values of companies in order to build in a margin of safety and achieve superior performance in the long run.
Maybe I should talk more about TTB and his fund management company Capital Dynamics. TTB is not only managing fund, but he also built up his own investment advising magazine, the "i Capital". Inside this magazine, TTB has written many articles about his view on politics, economy and company analysis. And there are several sections inside this magazine showing portfolio simulations that managed by TTB, and these portfolio simulations were showing impressive return. Due to some subscribers were making ton of money by following his portfolio simulations, they strongly requested TTB to setup a fund that allowed magazine subscribers, who are mostly retailer investors, to invest accordingly. Thus this is the history how ICAP was setup at the first place.
The 3rd reason I invested into ICAP at listing as I thought ICAP was launched at a right timing. As there were used to be only 2 stocks listed under the closed-end fund section - ICAP and AMANMFB. Amanah Millenia Fund Berhad ("AMANMFB") was listed as a closed-end fund at wrong time at year 1997 before the KLCI index was crashed to a low during the Great Asian Financial Crisis at year 1998. It was a stupid decision to launch AMANMFB (just like many of the existing conventional open-end unit trust fund always launched at a wrong timing) at an all time high as the KLCI index was traded at a P/E of 20 times. So coming through the Great Asian Financial Crisis, the performance of AMANMFB was very lousy and decided to close shop at year 2007. At the time the fund was liquidated after lasting 10 years, it only created an accumulated growth of 20% to its shareholders. So the CAGR of AMANMFB in last 10 year period from 1997 to 2007 was only 1.84% (=1.2^(1/10)-1)! If I was the shareholder of AMANMFB, I would rather put the money into the bank that could earn me a fixed-deposit rate that higher than 1.84% every year.
Whereby ICAP was listed at a mild bear market of which the KLCI index was traded at a P/E of 12 times at year 2005. It was because the investment strategy that the fund manager of ICAP employed was value investing. By launching the fund at a right time, the fund was able to use excessive cash to shop at the "Bursa" complex and acquiring shares at a bargain price.This reminds me what Warren Buffet has mentioned that "Be fearful when others are greedy, and be greedy when others are fearful". By contrasting the poor performance of AMANMFB with the bright side of ICAP, it boosted more confident for me to invest into ICAP.
The previous thread mentioned about how the compounding effect makes Warren Buffet being one of the richest man in the world. It is attributable to his ability to achieve a sustainable annual compounded rate of return (“ACRR”) at 26% for 41 years.
If Warren Buffet was only able to achieve a normal ACRR of 10% instead of 26%, what would be his performance after 41 years? Some might think that since 10 is about 38% of 26, so his performance will be around 38% of what he could achieve base on the ACRR of 26% after 41 years, i.e.USD57,000 (= 38% * USD150,000).
Those who are familiar to mathematic would argue that an investment with an ACRR of 10% does not worth USD57,000 after 41 years. Indeed, the investment merely appreciate to USD597 (=USD12 * [1+0.1]^41). The Table below shows more precisely how the gap in between 2 investments with different rate of return becomes wider after incorporating time period:-
From the table above, we should notice that the Investment A has a smaller return than the Investment B. Hence, the value of Investment A is far from equals to the value of Investment B after 11 years. The value of Investment A only equals to 22% of the value of Investment B (Another way to describe is to use the reciprocal of the percentage that indicates the value of Investment B is 4.45 times [=1/0.22] of the value of Investment A after 11 years).
The time effect will further amplify the gap in between the value of Investment A and of Investment B. The value of Investment A is then only 0.38% of the value of Investment B after 41 years (the reciprocal of the percentage indicates the value of Investment B is 261.87 times [=1/0.0038] of the value of Investment A after 41 years)!!!
Thus we should understand that the compounding effect is based on geometric growth rather than arithmetic growth. As an arithmetic growth is a function where one unit of principal makes exactly one unit of growth, whereby a geometric growth is one where adding one unit of principal makes more than one unit of growth. Put it another way to describe that the geometric growth is growing not only the principal but also the incremental interest earned by the principal.
Of course, we should take note that the compounding effect is a double edge sword which could bring positive or negative effect to us. If we were getting into an unproductive debt such as personal loan, consumer loan or credit card loan, the compounding effect will be against us (as there are some credit loans will charge us up to 18% interest per year to the due amount, and it is not even to take into the extreme case of the loan-shark rate). So we need make sure the compounding effect to be our friend by engaging activities that can stimulate positive compounding return.
Now it comes to an overall summary of the compounding effect that the larger the ACRR and the longer time tenure we could sustain the ACRR, the greater impact of compounding effect. And in order to enjoy the power of compounding effect, we should remember the golden rule of accumulation, that is start to invest as earlier as possible.
[Note 1: Formulas of measuring compounding interest Single compounding period per year function: FV = PV ( 1+r )^t
Multi compounding period per year function: FV = PV * (1 + r/n)^(n* t)
Continuous compounding period per year (Exponential) function: FV = PV * e^(r * t)
* FV = Future Value * PV = Present Value * t = Total time in years * n = Number of compounding periods per year * r = Nominal annual interest rate expressed as a decimal]
[Note 2: A typical story about the compounding effect If the Native American tribe (the Red Indian) that accepted goods worth 60 guilders for the sale of Manhattan in 1626 had invested the money in a Dutch bank at 6.5% interest, compounded annually, then in 2009 their investment would be worth over €900 billion (around USD1.3 trillion), more than the assessed value of the real estate in all five boroughs of New York City. With a 6.0% interest however, the value of their investment today would have been €130 billion (1/7th as much!).]
