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Investment House Calls On AMP Capital To Tackle Persistent Discount On China Fund

Tom Burroughes

21 July 2015

An investment group is calling for AMP Capital, the Australia-headquartered global asset management house, to help remove a large discount in the value of shares in a China-focused closed-ended fund when compared to the underlying value of its portfolio. The discount is currently 26 per cent.

LIM Advisors, which said in a statement it is the largest independent unit-holder in the Sydney-listed AMP Capital China Growth Fund, and owns around 12.36 per cent of this A$500 million ($368.8 million) fund, said it first approached AMP to tackle the share price discount in 2011. AMP Capital acknowledged the matter on 13 July this year, LIM Advisors said. (LIM Advisors oversees $2 billion of assets.) 

With closed-ended, listed funds, such as investment trusts, there are periods when the shares of these entities can trade at a premium or discount to the net asset value, or underlying value, of the fund. This can occur because of low liquidity in the portfolio, concerns about management of the fund, or, conversely, premiums to NAVs can build during strong market conditions or if a fund's management team becomes highly popular. Sometimes NAV discounts are seized upon by investors as ways to buy funds cheaply in the hope the discount disappears. In certain cases, boards of investment companies will state that if a NAV discount goes above a certain pre-determined level for a certain period of time – such as 12 months – they reserve the right to wind up a company, buy back shares, or take other steps to close the discount.

The fund in question was established in 2006 and for most of its existence there has been a share price discount. It is understood that complexities around Chinese taxes have played a part in this issue and that moves by mainland China to open up its capital markets represent an opportunity for such firms to resolve such issues. 

In the past few weeks mainland China stocks – and to some extent those in Hong Kong – have fallen after a strong rally. 

“We always take the concerns of our investors seriously and, as part of our fund governance, we have considered many options to sustainably close the discount to net asset value that the fund trades at,” AMP Capital said in a statement. “In previous years, many of these options would not have resulted in the discount being sustainably closed or were not in the best interest of investors. However, recent deregulation and ongoing clarification of local taxation laws mean some of these options may be viable in the future and, importantly, in the best interest of unit-holders,” it continued. 

“We are continuing to actively investigate these options with the assistance of our investment advisors. The AMP Capital China Growth Fund has been giving Australian retail and institutional investors unprecedented access to the China A-share market since 2006, allowing them to benefit from China’s growth story,” AMP Capital said. It added that for the one-year period ended 30 June 2015, the fund’s net return (calculated after fees, expenses and taxes) was 137.7 per cent and for the five-year period ended 30 June 2015, the fund’s net return (calculated after fees, expenses and taxes) was 19.4 per cent.

LIM Advisors, in its statement, said: “While AMP Capital has recently quoted large return numbers for the fund, the fact is each unit-holder's investment in the fund has under-performed compared to the fund's benchmark, which is the S&P/CITIC 300 Total Return Index. The fund's growth in net asset value from launch to June 2015 has been 13.1 per cent per annum (after fees and including distributions), compared to the S&P/CITIC 300 Total Return Index in Australian dollars of 14.0 per cent per annum. The actual return for unit-holders is further impacted when the large trading price discount to the net asset value is considered.

“This discount has seriously reduced the investment returns that the initial unitholders have received and this has meant that those buying into the fund since inception have been unable to realise the full value of the underlying net asset value,” it continued.
 
The investment firm said it has written twice to AMP Capital Funds Management to tackle the discount issue.