The Battle for the AMP China Growth Fund

The Morphic Global Opportunities Fund has a small amount of its China exposure held through the ASX listed AMP China Growth Fund (AGF).

We bought the stock in the hope that irrespective of how well the Chinese stock market performed, we could benefit from what was initially a 20% discount in the share price and the NTA of the AGF Fund being closed.

Thanks to a campaign by 10% shareholder LIM Advisers to force AMP Capital Ltd, the manager of the Fund, to liquidate it the discount to NTA has already narrowed to about 12%.

Shareholders will get a chance to vote on the matter next Thursday. We expect to be voting for the wind-up.

However, AMP Capital is still fighting to protect its management fees, and hoping that sister company, AMP Life, will ride to the rescue and vote its 37% stake in the Fund to keep the Fund alive.

One small snag for AMP Capital is that the NSW Supreme Court has ruled that AMP Life is conflicted and can’t vote. The AMP group is trying to overturn this in front of a three-judge appeal hearing on Friday.

Today, however, AMP suffered a fresh blow when respected institutional proxy adviser ISS recommended institutions to ignore AMP’s blandishments and vote in favour of the wind-up.

The ISS report is really a slap in the face to AMP Capital.

It is particularly telling because AMP Capital will almost certainly be a very important client to ISS, and there would have been a natural concern within ISS about taking such a clear stand. To its credit, ISS did not hold back at all – and opted into the fight when it could have simply stayed silent.

The real mystery is why AMP Ltd, the parent company of both AMP Life and AMP Capital is allowing this fight to go on.

 

THE AMP CHINA FUND HAS BEEN A VERY BAD INVESTMENT FOR AMP LIFE

If AMP Life had simply bought futures over the China A-Shares fifty index rather than back its sister company AMP Capital with this vehicle, AMP Ltd and AMP Life’s policy holders would have made 4.3% per year more money! Over ten years that compounds significantly.

Some of that is explained by the 1.65% AMP Capital used to earn every year from managing the Fund, but the rest is just poor performance by the AMP Capital investment team.

So AMP Life should be asking to vote on the wind-up, not to support AMP Capital, but so that it can vote to wind up the Fund and protect AMP Ltd shareholder and AMP Life policy holder interests!

 

WHO THE HELL IS IN CHARGE AT AMP LTD?

The math of who benefits within AMP Ltd if the Fund is closed or not is also interesting, and makes you wonder who is running the show there, and for whose benefit.

AMP Life owns 170m shares in the China Fund. If the Fund closes and the roughly 10 cents a share discount is received by AMP Life, there is $17m of gain to be shared between AMP shareholders and AMP policy holders, the vast majority of which goes to AMP shareholders. Conversely, if the wind-up is rejected, AMP China Fund shares could easily slump by 10%, losing AMP Life and AMP Ltd $17m on a mark to market basis.  Altogether that means AMP has $34m upside/downside swing in this battle!

Under the new 1.35% fee arrangements, AMP Capital will earn a gross $6.2m a year on the present NAV. Based on the standard industry rule of thumb of a 40% pre-tax cost to income ratio for fund management businesses, this suggests that pre-tax, AMP shareholders will earn $3.7m a year from AMP Capital continuing to run the Fund. So, assuming unchanged FUM, it would take more than four years for AMP Ltd to be better off keeping the Fund open than closing it.

The after-tax figures are even more skewed in favour of closing the Fund from an AMP Life and AMP Ltd perspective. Closing the Fund will generate a zero tax burden as the realisable after expenses NTA per share will be a little under $1 a share, and that is exactly what AMP Life paid for the shares a decade ago at the float. On the other hand, AMP Capital’s net return from its fees will be taxed at 30%! So after tax, we calculate it will take seven years before AMP Limited is better off keeping the Fund open.

And that assumes shareholders will support AMP Capital extending its contract to run the Fund when it comes up for a vote in November at the AGM, which I very much doubt they will, especially if AMP Life can’t vote!

Surely it is time for the new Chairwoman at AMP Ltd to bang some heads together. It would be bad enough to risk brand damage for the company in the short term from allowing this internal conflict of interests to persist if there was a long-term economic return. But when the whole of firm economic returns are negative as well, it seems very silly indeed.

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