Indirectly I have a six figure holding in Contango Microcap (CTN).
I do not have any interest in CTN’s investment manager, Contango Asset Management, (CGA) and I have no acquaintance or relationship with any of the players in this contest. I am just a retail holder.
Given the open CTN register, this is one occasion when my vote, or indeed the vote of a smaller holding, might actually tip the balance. Consequently, I have made the effort to speak with the existing CTN directors, Glen Fowles, David Stevens and Ian Ferres, on the one hand, and four people from the requisitioning camp on the other. I also spoke to chairman Mark Kerr. I understood Mr Kerr to tell me that, on legal advice, he was not advocating a position, one way or the other.
The CTN directors interest notice of 17 Oct 2016, indicates that both David Stevens and Glen Fowles are associated with sizable holdings in CTN, with 2,270,214 and 736,506 shares respectively. I further understand that neither is associated with holdings in CGA.
In contrast, those in the camp advocating removal of the above named CTN directors appear to me to have greater interest or association, either directly or by some other linkage with the investment manager, CGA.
Given that CGA’s business is in part reliant on the fees it receives for managing CTN’s funds, self-evidently it would be in CGA’s interest if the board of CTN is kindly disposed towards CGA. It appears that CGA must have been operating on the untested assumption that, as a matter of course, CGA would be the investment manager for all of CTN’s funds. Evidently CGA were shocked by the CTN board’s decision to place circa $27m with a second investment manager instead of CGA and that motivated the current actions. (The $27m was the proceeds from the sale of CTN’s residue of CIE shares.)
It appears to me that, if the requisitioners’ resolutions are successful, it will in effect deliver tacit control of CTN to CGA by changing the board composition at CTN to one that is more agreeable towards CGA. If that occurs, it is my guess that CTN’s funds would all be placed with CGA and there would be just about zero chance that CTN’s funds would ever be withdrawn from management by CGA.
As a justification for this attempt to unseat three CTN board members, it was put to me that it is now the accepted model that, de facto, a LIC should just be an appendage of its investment manager, which is what CGA seems to want to make CTN into. I am sceptical about all that, but there might just be some argument for that in circumstances where the investment manager floats the LIC, so that right from the start, investors know that they are buying into that particular manager’s “product”. But that is far from the case here. CTN existed long before CGA. CGA is just the recently contracted hired help.
Accordingly, it seems to me that, of all the parties, it is the existing CTN directors, that is the three directors currently under threat, whose interests are most closely aligned with mine as a CTN shareholder. Importantly, their recent actions demonstrate that they are independent of CGA.
I am happy to consider what anybody else has to say about all this, but based on what I have seen and heard to this point, I will be supporting the three existing directors of CTN. Accordingly, I propose to vote my shares AGAINST all five of the EGM resolutions, that is AGAINST the two proposed new directors, and AGAINST the resolutions to remove the existing three directors.
That said, the three CTN directors currently under threat, together with the chairman, unwittingly or otherwise, collectively oversaw the changes that have resulted in the current imbroglio. However, as always, everything is much clearer when viewed through the retrospecterscope than it ever appears in the crystal ball of prospect. Doubtless, the three directors didn’t foresee the current turn of events.
“1. Shareholders should be given the opportunity to vote on fundamental changes to the investment manager.”
Well we didn’t vote on appointing CGA. Seen from my perspective, appointing a second manager sends the clearest message possible to CGA that it is not indispensable. I can live with that provided CTN is not paying over the odds for the second manager to manage a comparatively small amount of funds (circa $27m), and even then, it might be still be worth any extra cost if it puts CGA on notice. (In any case I read the announcement to mean that the second investment manager is on the same percentage fee as CGA)
Most shareholders in CTN would have acquired their shares before CGA became the investment manager, so it is nonsense to argue that by and large, that CTN shareholders have an affinity or loyalty to CGA, or that they necessarily will be annoyed that funds were placed with a second manager without their approval. All the objections seem to be coming from the CGA camp.
“3. The proposed changes jeopardise the highly successful investment strategy of the existing investment manager”
Why? How? Management fees aside, the only downside that I can see is that the two managers might overlap and be competing to transact some of the same stocks. I understand that possibility has been considered and the different styles of the two managers make that unlikely. A downside with any manager who also manages other funds in the microcap space is that the limited investment capacity of the manager’s stock picks has to be shared out amongst the funds that the manager is buying or selling for.
The fickle finger of fate has not been kind to CGA in that the CTN investment performance in February was regrettable. According to the NTA notice, the CTN portfolio was down 5.7% relative to the XSO accumulation index over the course of February. That may be just an unfortunate blip, nonetheless the timing could not have been worse. My reflexive response, and I suspect that of many other CTN shareholders, is to think that CGA should concentrate on their stock picking instead of engaging in what appears to me to be a self-serving foray against CTN, who when it is all said and done, is CGA’s PAYING CUSTOMER.
One point to hold onto is that CTN is pretty much just a diversified portfolio of stocks, so the value of CTN shares should not depart too far from the value of the stocks it holds, regardless of any current uncertainty about who gets to drive the bus. Based on its declared top 20 holdings at the end of each previous month, a fairly reasonable estimate of its NTA can be made on any given day. Thus, informed traders have a much better estimate of what CTN should be worth than they do for ordinary stocks. However, CTN is not particularly liquid, so anyone attempting to dump stock faster than the market can absorb, will just provide bargain buys for others.
“7. The board of Contango should have a majority of independent directors.”
Absolutely, which prompts the question as to whether the candidates put up by the requisitioners are independent of CGA?
Are either of the candidates associated with shares in CGA?
Are the proponents of these candidates associated with CGA?
Do the candidates have any LIC experience?
The conclusions that I have reached about these questions do not convince me to vote for the requisitioners’ candidates.
Cheers
These are my opinions only. Nothing that I have written here should be construed as disparagement of any of the parties or entities involved. For all I know, all of the parties and entities may be completely convinced of the correctness of their actions and be acting from the highest possible motives with all due skill and care in accord with their various responsibilities and obligations. Any figures and facts are mentioned in good faith but I accept no responsibility for their accuracy.
CTN Price at posting:
$1.01 Sentiment: None Disclosure: Held
(20min delay)