Lim's Letter from google

Please contact LIM Advisors Ltd. at [email protected] or ring the LIM Advisors Information Line on 1300 648 8741 if you have any questions or comments
21 July 2016
Dear Fellow Investors,
Please support Resolution 2 by voting FOR the wind up of AGF at the Extraordinary General Meeting (“EGM”) in Sydney on 28 July 2016. Please vote FOR ending 10 years of underperformance and enabling you to realise your investment in AGF at Net Asset Value (“NAV”) less costs. Instructions on how to vote are included at the end of this letter.
SEVEN COMPELLING REASONS TO SUPPORT THE WIND-UP OF AGF
1) Our proposal to wind up AGF will benefit you and other Unitholders. If AGF is wound up, you will be able to exit AGF at a price close to the NAV per unit (less costs). An on-market sale of your units would deliver a price that reflects a discount to NAV. Historically, this discount has been significant, meaning that you would receive anywhere from 20% to 35% less than the NAV.
2) The risk is high that the historical discount will return if the Fund continues to operate.
While the average discount of 20% over the past 10 years has narrowed recently, almost certainly due to the pressure that Unitholders have brought to bear, we believe the risk is high that units will return to trading at their historical discount if our proposal to wind the Fund up does not pass at the EGM on 28 July 2016.
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AGF has traded at an unacceptable discount to its NAV per unit for many years, but the Responsible Entity (“RE”) of AGF — AMP Capital Funds Management Limited -- has failed to take adequate action to deal with this discount. In fact, the RE published their Explanatory Memorandum on 30 June 2016 stating that it does not consider the discount to be part of its mandate, despite the fact the RE is responsible for protecting the interests of all Unitholders. The persistent and deep discount is a statement by the market and Unitholders that they do not believe AMP will add value to the Unitholders of AGF and that there is insufficient demand in the secondary market for AGF.

1. 4)  AMP has major conflicts of interest in dealing with the discount.
   The RE has a fiduciary duty to look after the interests of all Unitholders and ignore its own corporate interests; any conflict of interest is not acceptable. AMP Capital receives a management fee based on the total size of the Fund. Open-ending the Fund or introducing periodic buybacks or tenders would probably initially shrink the Fund; any reduction in the Fund size reduces AMP’s revenue. AMP Capital’s refusal to consider open-ending the Fund or establishing periodic buybacks or tenders may indicate that it could be putting its commercial interest over the interests of Unitholders, who suffer losses from the discount if they sell on the stock market.
2. 5)  AMP has repeatedly ignored positive and fair ways of dealing with the discount.
   AMP is well aware that there are positive and fair ways to deal with the discount, such as opening AGF to regular redemptions and subscriptions at approximately NAV or by establishing periodic tenders at NAV (less costs) so that any Unitholder wanting to exit could do so at a price near NAV per unit. Our preference, and consistent recommendation to AMP, has been to open-end AGF to allow at least monthly redemptions so that all Unitholders can exit AGF at around NAV per unit (less relevant costs). However, because AMP refuses to consider any kind of opening of AGF and refuses to formally commit to periodic tenders or buybacks at NAV, we have no option but to propose to wind up AGF at an EGM.

6) Only the RE can open-end AGF or allow periodic tenders or buybacks.
Only the RE can initiate changes such as opening the Fund, converting it to a unit trust with regular subscriptions and redemptions, or establishing regular fixed buybacks or tenders. The Constitution of AGF and other relevant laws restrict Unitholders to calling an EGM to either replace the RE or to wind up AGF. Because the RE refuses to even consider this, we have reluctantly proposed to wind up AGF at the upcoming EGM on 28 July 2016, that the RE itself has called. The RE recommended that Unitholders vote against the proposal to wind up AGF.
7) AMP has not managed AGF well.
AMP charges a high management fee to actively manage AGF, as well as a performance fee to reward good results. Over its lifetime, AGF has underperformed its benchmark, and no performance fee has been paid. In 2015, there was a spectacular bull market followed by a crash in the Chinese A share market. AMP simply rode the market up and then down, following and slightly underperforming the index. AGF is not a passive index tracking fund; it is supposed to be actively managed. If AGF is only passively tracking the index, then AMP should convert AGF’s investment mandate into a passive index fund with a corresponding much lower fee structure.
Our Response to AMP Capital’s Rejection of our Proposals
AMP Capital has stated that it is difficult to run AGF as an open-ended fund because of the Qualified Foreign Institutional Investor (“QFII”) system in China and that it may take up to “several years” to get money out of China if AGF is wound up.
We have considerable experience investing in China and challenge AMP Capital’s statements.
AGF has invested in Chinese A shares through the QFII scheme, which requires Chinese government permission to repatriate capital from China. We have had experience with the QFII system, including investing through it when it was
first established in 2002, and have been through the repatriation system for our own funds.
The Chinese A share market that AGF invests in is very liquid, and the Chinese A shares held by AGF are generally liquid. In our view, almost the entire portfolio of A shares could be liquidated in a few trading days without damaging the market price of the shares held.
In fact, the liquidity of the underlying Chinese A shares in AGF strongly indicates that continuing AGF’s closed-end fund structure is no longer warranted. Historically, the QFII system and the restrictions on the repatriation of capital from China justified a closed-end fund structure. However, developments such as the Shanghai-Hong Kong Stock Connect, which allows foreign investors to immediately buy and sell Chinese A shares without government permission, mean that the QFII system should no longer be an impediment to running AGF as an open-ended fund. AMP could replace the QFII-purchased Chinese A shares with comparable shares purchased through the Shanghai-Hong Kong Stock Connect. In fact, AGF states in its reports that it is already using the Shanghai-Hong Kong Connect to invest in Chinese A shares.
According to AGF’s annual reports, AMP Capital has already repatriated capital for AGF at least three times in order to pay AMP Capital’s fees and make distributions to Unitholders. The QFII system may result in some minor delays in getting money out of China, but there are clear ways of dealing with this. For example, AGF could be gradually open-ended with initially only quarterly redemptions allowed with a reasonable limit (such as 20% of the Fund) on total redemptions at any such quarterly redemption date. The redeeming Unitholders could be put into a suspense account or separate account that would go through the repatriation process, which from our experience can take anywhere from one to three months – not “several years” as stated by AMP Capital.
AMP Capital has proposed a one-off tender to redeem up to 15% of units in issue.
AMP Capital’s proposal is woefully inadequate, and we have questioned the RE as to why there is any restriction on the size of the redemption offer. Why not allow an unlimited tender to allow any Unitholder to redeem if they want out of the Fund?
We have received no satisfactory answer and suspect that the restriction on the size of the tender is to reduce the loss of fee income that would result from shrinking the Fund size.
Should AMP Life – AGF’s largest shareholder and a related party – be allowed to vote?
AMP Life is the largest Unitholder of AGF, holding 36% of Units on issue, most of which were bought on launch in December 2006. Both AMP Life and AMP Capital are ultimately controlled by the same parent company, AMP Limited. On 27 June 2016, the New South Wales Supreme Court ruled in a case called AMP Life versus AMP Capital that AMP Life cannot vote its AGF units at the EGM scheduled for 28 July 2016 because it is a related party. AMP Life is now appealing this decision.
We call on AMP Life to respect this Court ruling and withdraw its appeal.
If the appeal does go through and the current judgement is overturned, we call on AMP Life to support our proposal to wind up AGF. Maintaining the existing fund structure is neither in AMP Life’s interest nor in the interests of its policy holders. The discount harms AMP Life in the same way it harms all other Unitholders. In fact, as the largest Unitholder of AGF, AMP Life is highly constrained in its ability to sell its Units on market.
We know from our own experience, as a large holder of AGF units who has bought and sold Units through the ASX, that the market price would be put under significant pressure if AMP Life were to sell down its holding in AGF. If this selling were undertaken aggressively it could drive the discount of AGF to previously unseen levels. An open-ending of AGF would therefore be in AMP Life’s interest since it would allow AMP Life to exit the Fund at around NAV per unit at any time of its choosing (subject to reasonable restrictions on the maximum redemption at any dealing day). It would also allow AMP Life to subscribe to new AGF Units at any time if it wanted to add exposure to China. If AMP Life was truly bullish on AGF or on China, it should have taken advantage of the large discount to increase their holdings. We hope that AMP Life will put the interest of its policy holders over the commercial interest of its affiliate, AMP Capital, in considering how to vote if it is going to do so and will support our proposal to wind up AGF.
How to vote to support the winding up of the Fund
All Unitholders should have received a proxy form from Computershare, the Registrars of AGF. If not, please contact Computershare or the LIM Advisors Information Line who will arrange to send you a proxy. For your vote to count, your proxy must be received by Computershare before 10.00am (AEST) Tuesday, 26 July 2016.
If you have already received a proxy form, all you need to do to vote for Resolution 2, our proposal to wind-up AGF, is vote ‘FOR’ by marking that box ‘x’. This means you are voting in favour of winding up AGF in order to redeem your investment at NAV per unit (less costs).
Yours sincerely,
LIM Advisors Ltd. Ruttonjee House 11 Duddell Street Central
Hong Kong
Please contact Nick Paris, a Director of LIM Advisors (London) Ltd., at
[email protected] if you wish to discuss this or have any questions. Background on LIM Advisors
LIM Advisors Ltd. is an Asia-focussed investment management firm based in Hong Kong with extensive experience investing in Asian and Australian bonds and equities, including Chinese equities and listed closed-end funds. We manage approximately US$1.7bn, and two of our managed funds own units in AGF, representing 9.98% of the total outstanding and making us the third largest shareholder. We have invested in AGF since 2010.