All About iCap Part 1

iCap stands for icapital.biz Berhad is the only closed-end fund in Malaysia. It is listed on the main board of Bursa Malaysia. All mutual funds in Malaysia are open-end funds which offers their holders the right to cash in their shares at each day's valuation of the respective portfolio. A closed-end fund however does not issue new shares directly to anyone who wants to buy them. An investor has to buy the shares not from the fund itself but from another shareholder who is willing to part with them. Just like a normal equity stock, the price of the share fluctuates above and below their net asset value (NAV) depending on two things: supply and demand.

The fund is managed by Mr.Tan Teng Boo who is the CEO of Capital Dynamics. He is a true believer of value investing, a method founded by Benjamin Graham but made popular after being modified by Warren E.Buffett. I have met the awesome man during my visit to Investor Day in KLCC. Like me, I am also using value investing and that means we invest in undervalued companies in Malaysia. The fund has a RM140 million paid-up capital with a fixed number of shares at any given time.

Below is the fund's philosophy: To allow long-term shareholders to benefit from value investing. Investing in the fund allows the power of compounding work for you to offer superior returns. I will leave the fund's investment portfolio for another day as it is quite extensive to cover in one posting. Instead, we take a look at the fund's performance, track record and current valuation.

 

Since inception at 19 October 2005, iCap has an annualised return of 20% and cummulative return of 156% comparing to KLCI 10% and 64% respectively. Bare in mind that the fund managed to hold the ground even through the tough subprime US crisis that lead to world financial meltdown, this is value investing at its best.

The way the fund is valued is via Net Asset Value or commonly known as NAV like all other funds. Unlike them, iCap is being traded as it listed in the main board of Bursa Malaysia and thus you have two prices: market price and fund's NAV. The more people value the fund, the higher the price it commands, this is much like a supply and demand thingy which dictates the market price. The true performance of the fund comes from its net assets and we derived it using the term NAV.

At the current market price of RM2.09/share, iCap has a shareholder equity of RM292 million. As stated earlier, the paid-up capital for iCap is RM140 million. With RM292mil-RM140mil we have RM152 million of retained profits from Mr Tan's successful investments to date.

If we look at the fund's NAV (I call this true performance as it takes into account all current underlying securities) we have RM2.54 which is RM355 million. Taking RM355mil-RM292mil you get RM63 million. This figure represents the surplus of market value over carrying value of quoted investments. Say you bought Genting share at RM10.33, while current price is RM10.50, the difference is the surplus of market value. I think you understand now :)

To sum this up as the below charts. It is clear that there is a shift of fund premium to discount region. The current discount rate of -18% of the market price to fund's NAV is a big boon for investors. Never has it been so cheap to load up on iCap since its inception. Why the shift if you ask me? My guess is that people was spooked back then during the peaks of 2007 before the crash. On the back of recovery, people have not put faith as they did once leading to a very boring counter. It will be some time before people start to realise how powerful value investing is and finally bring demand in to squeeze supply leading to higher market price for iCap.