How is ICAPITAL BIZ (5108) Performing?

The performance of ICAPITAL BIZ (the close end fund managed by Tan Teng Boo) had been lacklustre for the past three years, with compound rate of return averaging of 4.03% (calculated from their annual reports) compared to KLCI return of 9.53% (assume dividend yield of 3.2%). Its annualized return since inception in 19th October 2005 till 31st May 2014 remain impressive at 14.19%, this is significantly higher than KLCI annualized index return of 8.72% for the same period, and still higher than KLCI annualized total return of 11.92% for the same period (Total return = index return + dividend yield of KLCI stocks, average to be around 3.2% last year). 

Table 1: ICAPITAL BIZ annualized return compared with FBMKLCI 

(source : ICAPITAL BIZ annual report, here)

One of the investor blogger before me, AhYap had written some articles regarding ICAPITAL BIZ back in 2007 (here) and 2010 (here). I shall just continue on. 

The obvious reason why ICAPITAL BIZ's performance is lagging behind the benchmark (KLCI) for the past three years is their high level of Fund's Cash level. Mr. Tan and his management had been defending themselves with the following statement:

" What can the cash holdings potentially do to your Fund? Should the KLCI fall by 20%, the NAV of icapital.biz Berhad would drop only 9%, due to its current 55% cash holding. If the KLCI plunges 50%, its NAV would fall only 22.7%. This is the protection from its cash holdings. " 

Well, all i can say is the readers need to be aware that the reverse is also true. Cash holdings will give protection when market is falling, but cash market will hurt you also when market is rising. shall KLCI rise by 20%, the NAV of icapital biz will rise only by 9% due to its current 55% cash holding. Mr. Tan and his management had gone on with an illustration on how can they profit: 

"Table 4 below shows a scenario where we assume that the KLCI and the equity portfolio plunge equally by 50%. Again this example is merely for illustration purposes and is in no way a forecast or projection of future returns. Due to the cash holdings, the NAV drops only 22.7%...In such a situation, the cash assets will be deployed. Assuming an annual compound return of 15%, the NAV in year 6 will be 55% higher than in year 0 ..... In contrast, the KLCI will in year 6 be 16% lower than in year 0 (assuming its long-term past annual return of 11% for the KLCI)..."

Table 4: An illustration (source : ICAPITAL BIZ annual report, here)

Now, what if the reverse is happening, where instead of having a crash, KLCI continue its rising trend on 9.5% annualized total return as per past three years, and ICAPITAL BIZ continue its performance of 4% annualized total return as per past three years? Following table illustrates what will happen, where the investor sticking with KLCI will earn 30% more compared with investing with ICAPITAL BIZ.

The conclusion?

Mr. Tan and his management are currently relying on two skills to outperform the benchmark (KLCI):

i. Their ability to pick the stocks that will outperform market (stock picking skill)

ii. Their ability to time the market in order to buy low sell high (market timing skill). 

ICAPITAL BIZ current bid is that market will crash soon, which they act accordingly by hoarding more cash. It is too earlier to say whether their prediction/bid is correct or wrong, but here are my two cents:

i. History in stock market index movement tends to repeat itself but with less and less fluctuation in magnitude term. The lesser fluactuation (from index peak point to next lowest point during crash) is due to a) learned authority and regulator (the government and bank negara) in stabilizing the market during crash course, and b) more intelligent investors (especially institution investors like EPF and mutual funds) which will sell when they perceive the market is overprice, and start buying when the market is oversold. This means that, it is unlikely to see KLCI following crash course in 1998 where the index evaporated 76.7% from 1126.83 @ 3rd June 1997 to 262.7 @ 1st September 1998, It is also less likely to see the crash course in 2008 where the index evaporated 45% from 1516.22 @ 11th January 2008 to 835.17 @ 9th December 2008 (source)

ii. No news or major economic indicators indicating that Malaysia economy is going to hard-landing/market is going to crash soon. In 1998 we had the Asian Financial Crisis sparked by currency crisis of south-east asia countries, in 2008 we had the US. Housing Crash. As i predicted before:

"  It took at least three years for the sign of crash to be seen after US Fed raised policy rate starting June 2004. And we are still waiting for Fed to make its first move in raising the policy rate now, which will directly increase the borrowing costs and start slowing the economy (and housing market) down." 

iii. The market is definitely overprice now but the degree of overpricing still not reach dangerous level. Hoarding cash is a prudent move, but holding too much cash like 55% level, will hurt the performance of your portfolio.