LONDON, May 11, 2015 /PRNewswire/ --
Metage Capital Limited, as investment manager to various funds, has maintained a continuous investment in AMP Capital China Growth Fund (AGF) since February 2012. We consider that the most important issue for all unitholders in AGF today is the substantial discount to net asset value (NAV) from which the fund continues to suffer. While the market valuation of the fund's assets is so far below the determined fair value of its portfolio, all unitholders are greatly penalised for entrusting their capital to be managed in this AMP fund. We believe that in such situations proper corporate governance demands that the chief deliberations of the Board be focused on closing the substantial discount to NAV to which the fund is subject.
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AGF has suffered from this unacceptable discount for eight years now and it has persisted through both buoyant and weak financial market conditions. Indeed, the Board has presided over a fund with one of the worst discount records of any in its peer group.
For this letter to the Board we provide a discount history of comparable listed funds that invest in China using a meaningful allocation to Chinese A-shares as part of their mandate.
Exhibit 1: Discount history of listed Chinese A-share funds as at 31stof March 2015
Has the
Trustee/Board
undertaken
Average premium/(discount) buybacks or
over: tender offers
1 Year 3 Years 5 Years
AMP Capital China Growth Fund -21% -21% -21% No
Aberdeen Greater China Fund -11% -10% -10% Yes
China AMC CSI 300 IDX ETF 0% n/a n/a Yes
CSOP FTSE China A50 ETF 0% n/a n/a Yes
DBX Harvest CSI 300 China ETF 0% n/a n/a Yes
DBX Harvest CSI 300 ETF (Europe) 0% n/a n/a Yes
Fidelity China Special Situations -11% -8% n/a Yes
HSBC China Dragon Fund -23% -21% -19% Yes
iShares FTSE A50 Index ETF 0% 3% 5% Yes
JF China Region Fund -12% -12% -12% Yes
JPM Chinese Investment Trust -11% -11% -9% Yes
Market Vectors China AMC A-Share ETF 0% 2% n/a Yes
Morgan Stanley China A Share Fund -8% -6% -5% No
Templeton Dragon Fund -11% -11% -10% Yes
The China Fund -11% -10% -10% Yes
Average excluding
AMP Capital China Growth Fund: -7% -8% -9%
n/a label applied if inception date of fund is more recent than 1,3,or 5 years
Source: Company reports, Bloomberg
From this analysis two things are clearly apparent. AGF is one of only two funds that have not undertaken share buybacks or tender offers to manage their discount - with the other fund in question having traded sufficiently close to NAV not to have needed to undertake such actions; and AGF's discount has been over twice as wide as its peer group average over the last one, three and five years. Alongside a comparison of AGF to its A-share global peer group, we also highlight how AGF compares to the Australian listed investment fund sector. The below chart shows the premiums or discounts of all ASX listed investment funds[1] that have a market capitalisation of greater than $100M.
Exhibit 2: Premiums and discounts[2]of Australian listed investment funds as at 31stof March 2015
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Source: Company reports, Bloomberg
When compared to its Australian listed peers, AGF stands out as being the worst ranked fund in terms of discount to NAV by a substantial margin. That the Board allows such an exceptional discount to the portfolio value to persist means that AGF investors who need to realise their investment are subject to an effective 24% penalty when doing so.
In our view, proper capital management, through share buybacks or tender offers, is the most common and effective form of discount control for listed funds. If done at a discount such actions are accretive to the fund's NAV and given AGF's exceptionally wide discount would be highly accretive in this case. Such actions may also allow a fund to shrink to a size that is in-line with the actual outstanding investor demand for the fund.Lastly, and most relevantly in the case of AGF, implementing such capital management actions would demonstrate a clear willingness by the Responsible Entity to ensure that its investors'interests are primary and dispel any question that the Board's interests or judgement is not aligned with its investors.
AGF was floated on the Australian Stock Exchange (ASX) on the 22nd of December 2006. Since that date the fund's benchmark has increased by a total of 271% to the end of April 2015[3]. Yet over this same period, unitholders have seen the price of their units rise by just 50%, whilst receiving dividends equal to 39% of the start of period value[4]. This is an enormous underperformance against the asset class into which unitholders invested. We note that for this performance AMP Capital has been paid over $42 million in investment management and Responsible Entity fees[5].
Metage Capital has tried on several occasions to engage constructively with the Board with suggestions on how to address the issues raised above in the interests of all investors. To date we have found this experience disheartening. We therefore reiterate our two previous requests in this open correspondence:
- That the Board makes a public statement that it views a sustained discount to NAV of greater than 10% as unacceptable and that going forward it will make every endeavour to address this issue;
- That the Board initiates an appropriate capital management initiative as soon as is practicable which ensures adherence to this 10% target.
Investment management agreement with AMP Capital
The investment management agreement between AGF and AMP Capital expires on the 9th of November 2016. If the issues that we have raised in this letter have not been satisfactorily addressed by the Board by this time, Metage Capital will be directing its votes against renewing the investment management agreement for a further ten years. We have decided to publish this correspondence as an open letter to all unitholders to raise awareness of next year's vote and to highlight our concerns with the corporate governance at the fund to date.
Sincerely,
Miles Staude
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1. As listed on the ASX website under "LICs & Trusts".
2. Based on pre-tax NTA figures.
3. S&P/CITIC 300 Total Return index in Australian dollars; Bloomberg LP.
4. AGF Company reports.
5. AGF Company reports.
Contact: Miles Staude: info@metage.com
