Hi Cutty
I was planning on taking a break from posting as I’m not sure that many are that interested in what I have to say either
However, I have just had a perusal of the paperwork and, especially given the 16 pages, I was underwhelmed by their “Urgent call to action” (particularly as the title was misleading as there was nothing IMO urgent about it); I felt like it was designed to scare shareholders, for example with the choice of red as a background for the headings, together with large font bold style capital letter heading on the front page.
I strongly disagree with the proposal. Here are my thoughts:
- TSR was based on stock price. Value has been created by VGI in the form of a much greater increase in NTA, need to consider not just one point in time.
- graph on cover sheet: misleading use of statistics to not include zero at the base of the Y axis to make it look like the 2 lines deviate much more than they really do (a simple trick used in advertising so often, but shouldn’t be used to trick people out of their money IMO)
- I predict that if they had drawn with zero at base of Y axis, the 2 lines would approximate each other far more closely/i.e. show a much more positive correlation
- even so, their graph demonstrates a reasonable correlation excluding the last year
- furthermore there’s a very close correlation between current NTA and index (if it were to be trading currently at a premium, as it has at other times, it would look very similar to the index on this graph.
- “doubt that Buffett would consider investing in VG1” - is that relevant?, do they really know what Buffett would invest in? Who predicts them before he announces his purchases, what other Australian LICs or stocks for that matter has he invested in (barely any), I doubt he would because he doesn’t invest in LICs generally.
- “there was minimal progress by VG1 to adopt any of the various solutions we tabled” - because they’ve already addressed this with multiple strategies and which by the way appear to be working already
- “seemed to focus on obstacles to implementing change rather than solutions” - I think what they must mean is rather than their solutions it’s simply untrue that they haven’t already implemented multiple strategies to close and hopefully eventually reverse the discount. To say they haven’t focussed on such strategies is an outright falsehood IMO and misleading.
Section 1.
- As they admitted, they conveniently chose to ignore the VGI entitlement offer, a key feature, in their calculations of TSR.
- “shareholders can only sell shares at a large discount to NTA” but they chose to ignore periods of time pre-pandemic-stock market crash where you could sell at a premium (the stock price fell during the pandemic, isn’t that a coincidence?)
2.
- “Investment performance has been choppy” - would you expect anything else from exposure to equities?
- re the “mea culpa”, wouldn’t you prefer an honest manager rather than those who neglect to openly canvass their errors (or even pretend or imply they don’t make any)?, even Buffett himself, whom the authors compare with, regularly admits the errors he has made.
3.
If they prefer ETFs, why don’t they go buy one and pay all the tax on all the distributions they are forced to pay out rather than the option to reinvest and compound capital (in a tax favourable way also)?
If they don’t like active managers, buy an index fund.
Fees appear large but need to be considered relative to the returns which are many magnitudes larger. High fees means an even higher performance was accumulated, i.e. the higher the performance, of course the fees generated will be higher, no performance fees means zero NTA performance was generated.
4.
To be fair and accurate you can’t use a single point in time as a reference, you should use an average price/NTA ratio.
“the investment results will fix the discount has clearly not worked” - but the SP has increased significantly since then. It’s foolish to judge equities over short time periods, IMO it’s often the best time to buy when they are cheaper if one is patient as underperforming periods can be followed by extremely positive performance.
Comparison with Geoff Wilson is not necessary, many would regard him as the doyen of LICs in Oz, with a multi-decade experience, yet even he has multiple funds that struggled from a SP perspective for some time, before in some cases performing very well after that. It takes time after listing to earn a reputation; the unlisted reputation isn’t necessarily enough.
5.
The fees were disclosed clearly in PDS and included worked examples, did they not read the documents, they apparently have a pattern of engaging in this “activism”, I would presume they are sophisticated investors and should/would have known the fee structure before they became shareholders so if they thought it was inequitable then they shouldn’t have invested.
6.
The investment team are well qualified. It’s clutching at straws to include this in their top 10 grievances. Just because a member of the team leaves isn’t a reason to change the fee structure. Does any other Fund have such a policy?
“This comparison ignores the chronic discount to NTA” - well, they are separate points so why would they need to reference their wonderful long term record to try to “justify” a current market discount?, nonsensical.
8.
When VG1 engages in the on-market share buyback, I didn’t think that this reduces the Manager’s fees as the total returns of the Fund stay the same so the fees are the same (i.e. less shares, but higher EPS).
VG1’s buying stock at a discount actually increases the EPS.
Management buying stock is a good (not bad) sign.
Anyone, not just the Manager, can enjoy the benefits of purchasing the shares at discount on-market.
9.
Full of anecdotal material, where is the evidence for this?
How is short term market pricing relevant (especially when it’s post-Covid + the adverse news event of the department of Doug Tynan), for much of its life (pre-2020) it’s traded at a premium to its NTA.
Fair comment if you only consider the average returns including the most recent market price, versus a large part of its listed life pre- the last year when Covid hit the world and sharemarkets.
SHs aren’t “long suffering” and RL’s comments are reasonable.
10.
None of these are desirable or necessary.
E.g. LICs allow selective focuses e.g. portfolio exposure to Asia.
To convert to an ETF has both advantages and disadvantages, so how is that fair to investors who knowingly invested into an LIC structure, not an ETF, to now change it because it suits some SHs over others at a point in time?
The structure was linked to VGI entitlement so to be fair and consistent with the outlined arrangement would fairly need to compensate VGI due to a change in the agreement
Other points:
- it’s an absolute return fund, aiming for 10+%, hence the fees are structured relative to absolute returns, not to an index, then they’ve structured it with a pro rata fee rather than a hurdle; according to the AFR, this is comparable to other funds. Alternatively, if the hurdle fee structure had been chosen the performance fee percentage may have been higher. The comparison depends on the time period used e.g. during a negative or low return year for index with a high return for the fund, the fees via a hurdle fee structure could be way higher.
- at what price did they invest? Did they buy low then look to make a quick buck by trying to achieve a short term profit before flipping the stock in order for them to go into their next activist target while the rest of us have to possibly pay taxes (rather than allowing the investment to compound) then also have to find a new better investment than VG1 to switch into.
- $2.17, when somehow media speculation started about their report being released, was coincidentally a low point just before it rose for several consecutive days up towards $2.30 within a week; it’s currently trading at $2.25, this is all based on short term nonsense - basically that’s how equities behave, all the harping on about a 3% per annum return over past 4 years is blown out of the water as from the time they printed until the week it takes mail to arrive by Australia Post the returns have almost doubled (i.e. we’ve almost received 4 years returns in approx. 2 weeks!), equities can move quickly and powerfully, just as we’ve had a sharp fall during 2020 then a sharp rebound then a sideways period, stocks can move suddenly and strongly without notice, and sometimes without a “notice” to the ASX, rather just because they were cheap or because they were cheap and someone noticed this thus pushing the price up causing more to notice etc - what about when it was trading at a premium?, how do they explain the benefit of being an ETF then? (double whammy = lower share price, higher taxes).
Sure, this hasn’t been VGI’s best period, but it’s not like we’re looking at a loss even, they’ve still managed a small positive return, more than you’d get in cash.
This appears to be short term thinking when it’s intended to be a long term investment.