SYDNEY, June 15, 2016 /PRNewswire/ --
LIM Advisors, the second largest independent unitholder in the ASX-listed AMP Capital China Growth Fund ("AGF"), has questioned whether the fund is really 'Fit for Purpose' and has called on AMP Capital Funds Management Limited ("AMP Capital"), the Responsible Entity that manages AGF to now let unitholders decide whether it should be wound up at an Extraordinary General Meeting in late July.
Discount closing initiatives ineffective
LIM Advisors which currently owns 9.98% of the outstanding units in AGF wrote to AMP Capital in July 2015 asking it to address the discount on AGF units as this was too high having averaged 20% since the fund launched in December 2006.
In August, AMP Capital hired Goldman Sachs to advise them on a strategic review of the fund and in October, they announced a number of strategic enhancements in order to address the discount revealing that their discount reference point was 15%. They asked unitholders to give these enhancements six months to work (i.e. to 31 March 2016) and stated that they would then hold an internal Fit for Purpose review to consider the effectiveness of their enhancements.
LIM Advisors Portfolio Manager Nick Paris did not believe that these changes would be sufficient and called an AGF unitholder meeting (an "EGM") in October 2015 seeking to change the fund's constitution to impose a 10% discount ceiling on AGF.
"We received significant support from other AGF unitholders for this action. However, we were persuaded by the RE to cancel that meeting and wait for the enhancements to work on the basis they would then call a unitholder meeting in July 2016, at which unitholders could review the effectiveness of the initiatives," Mr Paris said.
Result of the recent Fit for Purpose review
AMP Capital has now concluded its review, announcing on 20 May 2016 that the fund was 'Fit for Purpose' but that a number of new enhancements would be proposed. However, there was only a brief reference to the AMP's own target discount of 15% and no reference at all to LIM's 10% discount ceiling.
Mr Paris said that it was LIM's view that AGF is not 'Fit for Purpose' because it has under-performed its benchmark index since launch and because the average discount on AGF units since launch has been an unacceptable 20%.
"Importantly, the discount during the recent six month review period has been 20% too and it is therefore unchanged and significantly above AMP's 15% target and LIM's 10% ceiling and this is not acceptable to unitholders," Mr Paris said.
"This 20% discount between the market value of units and the actual asset backing of the units represents a massive value loss to all AGF unitholders and it is clear that AMP's enhancements have not worked sufficiently to reduce the significant discount."
On 20 May 2016 AMP announced eight new enhancements to the fund including proposing a change to the investment mandate to improve the investment return potential of AGF.
"Whilst we broadly agree with these new enhancements, in our opinion they will again not be sufficient to reduce the fund's discount," Mr Paris said.
Resolving the AGF discount
According to LIM, the AGF discount is caused by the fund's failure to outperform its Chinese A share benchmark and by a lack of sufficient demand in its chosen market of Australia for Chinese A share exposure.
"In short, the fund has been too large for the available demand for it. AGF therefore needs to redeem outstanding units in order to re-size itself to match the available demand," Mr Paris said.
In August 2015, LIM asked AMP to change its investment process in order to improve performance but this request was ignored. This change is now being proposed by AMP more than 10 months later although it may take some time for any benefits of this change to be seen. AMP are also now proposing a redemption offer to buy back up to 15% of outstanding AGF units at a price of NTA less redemption costs plus an on-market unit buyback of up to 5% of units over a 12 month period.
"We believe that AMP Capital should introduce a redemption offer of unrestricted size in order to buyback units at their NTA less redemption costs as we believe that all unitholders should have the ability to sell their units at close to the current A$1.00 net asset value of each unit which is significantly higher than their current A$0.81 market price," Mr Paris said.
"We accept that this request places AMP Capital in a position of conflict as any redemption would necessarily reduce the number of units on issue and therefore reduce the management fees payable to the AMP Group. These totalled A$10.6m in calendar year 2015."
Unitholders to decide AGF's future at an end July EGM
AMP has committed to holding an EGM of unitholders at the end of July and to publishing the Notice of Meeting in late June. They will then be seeking unitholder endorsement for their actions since October as well as their recent new enhancements.
LIM does not believe that the past and proposed new enhancements from the RE will significantly reduce the discount on AGF units. It is also concerned that statements in recent Annual Reports to unitholders that the RE would ask unitholders to vote on extending the existing Investment Management contract for its affiliate AMP Capital when its 10 year contract expires in November 2016 are now being ignored.
"The RE has now proposed an alternative way of re-engaging AMP Capital to manage the fund without needing unitholders to vote on it, LIM thinks that AMP does not want unitholders to have the chance to hold AMP Capital to account for its sub-index performance and the large discount since the fund launched," Mr Paris said.
"This is another example of the weak corporate governance surrounding the way that this fund is run as there is little independent oversight on our RE.
"We believe that AGF unitholders should have the chance to review the success of the fund now that it is close to 10 years old.
"As a result we have requested that the RE add a resolution at the July meeting that AGF be wound up," Mr Paris said.
About LIM Advisors
LIM Advisors Limited is an Asia-Pacific-focused multi strategy investment group, founded in 1995 by George W. Long, originally under the name Long Investment Management Limited ("LIM"). LIM is based in Hong Kong and has wide regional coverage, with additional research offices in Tokyo, Beijing and London. LIM has extensive investment expertise across the region and has been investing in credit and equities since the firm's inception.
Background
AGF is an ASX-listed fund investing in Chinese A shares which is managed by AMP. On 10 June 2016, it had an NTA of A$472m, a market capitalisation of A$382m and its units traded at a 19% discount.
LIM Advisors is an institutional investor in Asian (including Chinese) bonds, equities and closed end funds. It has approximately US$1.7bn under management and two of its funds have been invested in AGF since 2010. It currently owns 9.98% of the outstanding units in AGF.
