Wednesday, July 11, 2007

Investment Mistakes Part 4 – Company’s Management

To continue the series on investment mistakes, my next mistake was to buy a company in which I had no faith in the Management. The “company” in question was actually Macquarie International Infrastructure Fund (MIIF for short). This was actually an infrastructure fund which invested in assets such as airports, toll roads and oil storage tanks. I purchased 3,000 shares at S$1.15 on May 27, 2005 and sold out at 95 cents on Dec 15, 2005, incurring a loss of 17.1%. The selling occurred after an EGM held by the company to approve the issue of new units in MIIF to fund the purchase of additional assets which were yield-accretive.

The strange thing was that these new units would rank pari-passu with existing units in that they were entitled to the dividend of 3 cents per share promised to shareholders as at Dec 31, 2005. The circular did not attempt to explain this and I was left wondering what Management’s explanation would be. I therefore made it a point to attend the EGM to ask questions of the Management. It would be my first experience with the Management of the companies I own and would open my eyes to the importance of talking to the people in charge of the company (or in this case, the fund).

Many shareholders bombarded the Management with the same question, apparently because they were disgruntled that the “new” shareholders would be entitled to the same dividend as existing shareholders when they were only vested from mid-Nov 2005 till Dec 31, 2005. By right, the dividend should have been pro-rated to the amount of time the new shares were in issue till year-end. In fact, Suntec REIT had done exactly the same thing when they issued new units to fund the purchase of the remaining space by minority tenants. The new shares which Suntec REIT issued were only entitled to the pro-rated dividend, and the Management took pains to separate the dividend into two components, one for existing shareholders and one for existing and new shareholders.

In MIIF’s case, the CFO and CEO could not give a convincing explanation as to why this was NOT done, and many of the shareholders (myself included) felt shortchanged and bullied. This incident showed that Management was not sympathetic to existing shareholders who have stood by the fund since its IPO. After the EGM, I thought over the incident for a few days and then promptly sold off my shareholdings for a loss.

Lesson Learnt: Always try to engage Management on issues relating to the company if you can, be it through emails, EGM or AGM (most common method). It need not be about the issue I described above; discussions may range from the company’s prospects, strategies undertaken, markets targeted, customer base, product range, revenue streams and margins just to name a few. I have had the fortune of meeting the Management (including the chairman and CEO) from Ezra as well as Swiber and engaged them on several aspects of the business. Most of the time, things to look out for would be their manner in answering queries, their attitude, how willing they are to open up, whether they are evasive and how passionate they are about the business. Do also note that Management may get over-zealous about their business prospects but it is up to the discerning and intelligent investor (to quote Benjamin Graham) to sift out the yarns from the facts. Always keep an open mind and think over what Management has said, in order to draw conclusions and insights.


Anonymous said...

Fisher said in his "when to sell" chapter to sell when you made a mistake. It is a pity you've incurred loss through this incident as probably you've invested in MIIF for its dividends. But the honesty to yourself and the willing to take a loss showed what great investor is made of. One of the other reason to sell is when you find better investment, guess swiber, if your fund is shifted in, has more than make up the 17% loss. Good luck.

musicwhiz said...

Hi Anonymous,

Thank you for the encouraging words. Yes, the initial plan was to invest in MIIF for its dividends but I did not forsee such issues cropping up, so I guess it is part of the risk of investing. I have always advocated honesty to oneself and the ability to accept mistakes as we are not perfect; thus you will see me writing about a few more mistakes in the coming days/weeks !

As for switching to a better investment, I agree with your view provided there is a more attractive investment out there. Currently, there are very few bargains lying around as most companies seem over-valued (plus I did not take much time to properly research any potentials). Thus, at the moment, I am holding on to my portfolio and NOT adding any other companies to it.

Good luck to yourself too !