Global Investments

[touzi]

https://links.sgx.com/FileOpen/011_20230...eID=750399

Exposure to Credit Sussie CoCo bonds is only 2.33% of NAV. But exposure to other CoCo bonds is close to 50%. With the market repricing these bonds, I guess that is why GIL share price drop by about 16% today.

[ghchua]

https://links.sgx.com/FileOpen/011_20230...eID=750399

Exposure to Credit Sussie CoCo bonds is only 2.33% of NAV. But exposure to other CoCo bonds is close to 50%. With the market repricing these bonds, I guess that is why GIL share price drop by about 16% today.

Hi touzi,

GIL share price had been trading consistently below its NAV. Average discount had been around 30% or thereabouts. With the above issue, I guess its underlying CoCo bonds will be volatile going forward, at least in the short term until things becomes more clear. But will that justify further discount from its NAV? I am not too sure actually, since those investments are marked to market.

Most of the other CoCo bonds that GIL is holding are mostly large European banks. However, since GIL is a mutual fund, I guess we should trust the manager to make the right decision in terms of portfolio allocation and decisions going forward, and not to actively trade the stock itself.

[weijian]

10)              Question remains: how long could this DPS = 1.5 cents be maintained, with increasing number of new shares being issued each year?
11)              To cover Cash Dividend Distribution of about 22.5 m (assumed) in FY2016, ROE required (net of management fees and expenses) ~ 7.7% (= 22.5 / 292.2)
12)              So, was ROE of 5.9 % in FY2015 just a blip ? Only time will tell !
_____________________________________________

To carry on what Boon talked about in 2015.

AR2015
share count: 1,446,433,831
DPS: 1.5cents
end year share price = 13.8cents

AR2021
share count: 1,591,021,601 + 132,820,845 (treasury)
DPS: 0.8cents
end year share price = 15.6cents

Excluding treasury shares, share count has expanded ~10% in the last 6 years (or a CAGR of ~1.6%). Including treasury shares,  share count has expanded ~19% (or a CAGR of 3.2%)

As for dividend, DPS has reduced a whopping 47% in the last 6 years (or a negative CAGR of 7.8%)!

It is never a good sign when a "high dividend" yield (~10% back in 2016) stock has a scrip dividend option. In general, scrip dividend is used to either silently take over the company by the controlling shareholder, OR it is a simple disguise that the DPS is not sustainable on a cashflow basis over time. Since the majority shareholder in Global Investment has a long way to take over, we can probably rule out that intent.

[ghchua]

It is never a good sign when a "high dividend" yield (~10% back in 2016) stock has a scrip dividend option. In general, scrip dividend is used to either silently take over the company by the controlling shareholder, OR it is a simple disguise that the DPS is not sustainable on a cashflow basis over time. Since the majority shareholder in Global Investment has a long way to take over, we can probably rule out that intent.

Hi weijian,

If you track back, DPS had been reduced when GIL was re-domiciled from Bermuda to Singapore since 2018. I disagree with you that DPS for GIL was not sustainable on a cashflow basis. If you take a look at their latest FY result, they have cash and cash equivalents of $51m, definitely enough to fund a higher dividend payout.

The problem is that the change in operation now to a Singapore registered Company means that they must have enough retained earnings to fund those dividends. And since investments are marked to market at the end of each financial year, there will be years when they might suffer losses. Therefore, DPS cannot be too high. Otherwise, they might have negative retained earnings which means no dividend if they make losses on a financial year.

One must understand that those shares for funding the scrip dividend scheme are from share buyback mandate. Which means, shares were bought back from the market using cash, and then re-issued to shareholders via scrip dividend scheme.

[Choon]

"In general, scrip dividend is used to either silently take over the company by the controlling shareholder.."

Can please explain? If all SHs receive it proportionately, why so?

[weijian]

@ghchua,
Thanks for providing more resolution to my "2 data point" (admittedly simplistic) study. To clarify, I was alluding to the situation in 2016, when the market rated it at ~10-11% yield. Fast forward to today, it was yielding at a more "believable" yield of mid single digits before its CoCo bond worries. As a value investor, I subscribe to the principle that there cannot be assets so good that they can't become bad purchases when bought too expensive, and that there cannot be assets so bad that they can't become good purchases when bought cheap. Therefore, you bought up good points on looking at GIL again, especially when it is beaten down now.

@Choon,
While all shareholders vote on resolutions relating to share issue and scrip dividend to approve scrip, the controlling shareholder has the say in the timing on when to offer it. So that is the first advantage. Secondly, since they have the advantage of deciding the timing, more often than not, the controlling shareholder has the tendency to take up more of the full scrip than the OPMI (as a single entity). For example, some OPMIs may need the money and so they take the cash option. So despite all been offered proportionately, the end result is that over periods of time with scrip, the controlling shareholder will end up with a higher % ownership than before. Ditto with sharebuyback.

[weijian]

Great questions asked by ghchua during the AGM. I concur with him that GIL mgt should attempt to close the gap between NAV and share price, and that re-issuing treasury shares at a discount does not aid that objective. The general takeaway from the Q&A seems to suggest that GIL mgt is "comfortable with the status quo of a discount to NAV as it is the norm". In addition, they are (indirectly) admitting that they do not have the money to do sharebuyback and give cash dividend at the same time.

Finally, one can do a share buyback without the constraints of having retained earnings, but dividends have to be declared out of retained earnings. With 60% of the dividends (from retained earnings) taking scrip, it means there is a transfer from "retained earnings" to "share capital". So share capital will be maintained and the impact of cash outflow (non scrip dividend) on share capital will be isolated/reduced. Does this structure suggest that it is a safeguard for the manager to have their capital in-tact to keep investing perpetually? So can we assume the manager largely get their cash from their fees and not dividends? Without a focus on narrowing the gap between NAV-share price and alignment of getting paid via cash dividends, are OPMIs getting shortchanged?

Minutes of the 2023 Annual General Meeting

Question:  I would like to seek clarification from the Board on the rationale of doing Share Buyback and re-issuing of the treasury shares to shareholders via scrip dividend scheme at the 10% discount. How will Share Buyback help to narrow the discount between the Company’s share price and NAV? I think the way to narrow the discount is to cancel the shares after share buybacks and not reissue them at a discount to the prevailing share price. You are generating the demand and supply of the shares and it does not help to narrow the discount.

Answer: The Company does not conduct share buyback to push up its share price. The Company only buy back shares when people are selling them on the market. Based on past scrip dividend issuance, approximately 60% of shareholders opted for scrip dividends. It is more efficient to use treasury shares for scrip dividend as compared to cancelling those shares and reissuing them again. The Company had a good balance for its share buyback and re-issuance of treasury shares. The Share Buyback programme also provides liquidity for shareholders who sell their holdings due to the need for cash or differing opinions.

AGM MoM: https://links.sgx.com/FileOpen/045a_2022...eID=759830
AGM ppt: https://links.sgx.com/FileOpen/045b_2022...eID=759831

[ghchua]

Hi weijian,

Finally, one can do a share buyback without the constraints of having retained earnings, but dividends have to be declared out of retained earnings. With 60% of the dividends (from retained earnings) taking scrip, it means there is a transfer from "retained earnings" to "share capital". So share capital will be maintained and the impact of cash outflow (non scrip dividend) on share capital will be isolated/reduced. Does this structure suggest that it is a safeguard for the manager to have their capital in-tact to keep investing perpetually? So can we assume the manager largely get their cash from their fees and not dividends? Without a focus on narrowing the gap between NAV-share price and alignment of getting paid via cash dividends, are OPMIs getting shortchanged?

The discount between NAV and share price is not part of their KPI as they have replied. So, most likely they will leave it to the market to decide, while doing share buyback and re-issue those shares back via scrip dividend scheme at a discount from market price.

For a fund manager running a fund with a base fee based on Net Investment Value, of course increasing the fund size has a positive effect on the base fee. Having said that, they are a closed end fund and have limited avenues to increase the fund size via inflows, unlike open ended ones. Therefore, I guess the focus for them would be trying to generate a decent return to shareholders yearly via dividends, while attempting to maintain or increase the fund size via scrip dividend scheme to limit the cash outflow.

I don't think OPMIs are particularly short changed, if they can receive a decent dividend yield yearly. Having said that, by not participating in the scrip dividend scheme, they would be diluted further by shares issued at a discount from the market price which can be seen in the drop in NAV each time those shares are issued out of treasury.

To take this discussion further, I think one would require an activist effort by OPMIs if they wish to realize their investment in GIL at or near NAV eventually. Which is to block the scrip dividend scheme resolution presented every time during AGMs and push for eventual liquidation of the fund.

[weijian]

In the last 2 years, GIL had a ~250mil portfolio that generated ~13.5mil of income, excluding capital/FV gain/losses. This is a "gross ROA" of ~5.6% based on a portfolio that is ~60% bonds, 20-25% cash and 15-20% listed equities (page4 of AR2023).

Excluding fees incurred from listing and statutory requirements, Mgt related fees include base/fixed/incentive/acquisition/divestment/incentive fees. The cumulative deficit is deeply in the red (~25% of book value) and so incentive fees will probably never be incurred. For the rest of fees paid to the investment manager, it is ~3.5mil and that is a quarter of the gross returns OR ~1.5% of total book value. Pretty expensive fees for a mid single digit return for this kind of 60-40 closed end fund I suppose?

GIL AR23:
https://links.sgx.com/FileOpen/042a_2024...eID=794118

[ghchua]

Hi weijian,

I think a more fair comment would be that their Base fee of 1.0% of Net Investment Value. As for acquisition fee, divestment fee and debt raising fee, it really varies year on year, depending on how active they are in the markets. The $3.5m you have cited is FY23 numbers, and it is probably on a high side due to higher acquisition and divestment fees in FY23.

As for incentive fees, it is based on GIL share price over its benchmark. So, yes, GIL share price had underperformed for the past few years and therefore, no incentive fees had been paid, based on high watermark. But it doesn't mean that incentive fees had never been paid. If you look at earlier years, there were some years where incentive fees had been paid out.

I think by just looking at income generated by GIL in one year is not looking at the big picture. After all, fund managers managing unit trusts always give you total return numbers (which include capital gain/losses) in the long term. Why you are looking at GIL on the "income lens" for one year only?

A more accurate picture would be looking at ROE numbers chart since 2009 presented on page 14 of their latest annual report. You can see that they had generated more than 10% ROE in some years previously. The NAV chart on the same page also shows you that they have grown their NAV from $119.4m in 2009 to $258.4m in 2023. Why since 2009 you might ask? Because that was the year when SICIM took over the management of the fund from Babcock & Brown.

Finally, do take note that asset allocation is never static. The fund is managed as an absolute return fund, with the aim of delivering regular dividends and capital growth consistently.