A Friday night announcement illustrates all that is wrong with HK's Listing Rules for closed-end funds.

The national investment fund that isn't
23 March 2019

National Investments Fund Ltd (NIF, 1227) exemplifies all that is wrong with the Hong Kong Listing Rules for closed-end investment funds, known as "Chapter 21" funds, after the relevant chapter of the Listing Rules. Despite the name, it is neither national nor is it really a fund but rather, a tool for abuse of public capital.

A Friday night announcement states that NIF is selling various assets including 7 cars, a 1.06-carat yellow diamond ring, a painting artwork and a membership debenture for The American Club, to Danny F Wong (Mr Wong), who last week resigned as an executive director of NIF. The question you should ask is why did a fund own such assets in the first place?

The investment objectives of NIF, as stated in its 2002 prospectus, were to achieve "capital appreciation by investing in listed and unlisted companies mainly in Hong Kong and the PRC." Like most such listings, the fund started with no track record, an all-cash balance sheet, an appointed investment manager and a custodian.

There's no reason an investment fund should need any employees at all, let alone cars for them to drive (or be driven) around in or recreational clubs to go to. All the investment decisions should be made by an investment manager overseen by a non-executive board, and there should be no overlap between the two. Administrative tasks should be handled by a professional administration firm, often one which is a fellow subsidiary of the investment manager. A fund should not need office premises or other property, plant and equipment for its non-existent employees to work with, nor should it need a share option scheme to incentivise them. Chapter 21 doesn't prohibit any of this.

At 31-Dec-2017 NIF had 26 employees (including 6 directors) and racked up HK$20.813m paying them. Meanwhile, the appointed investment manager, Avia Asset Management Ltd, was paid just HK$55k per month - a token fee to maintain the pretence that NIF is a fund at all.

The cars, diamond, artworks and club membership are clearly not listed or unlisted equities within the fund's stated objectives. The cars are depreciating assets with no prospect of "capital appreciation". This HK$5.838m sale of assets is not even the worst of it: the 2017 annual report revealed the sale of a diamond on 5-Jan-2018 for HK$16m in cash. The fund acquired the rock along with unspecified art work and a diamond ring (the same, probably) in 2014. These and other assets in NIF's balance sheet have been circulating around what we call the Chung Nam Network for years. A 10-carat diamond was an asset in transactions involving Mason Group Holdings Ltd (then Willie International Holdings Ltd, 0273) and Karen Lo Ki Yan in 2007 and 2009.

The 2017 report also states that in March 2017, the fund donated HK$200k to the (fee-paying) Hong Kong International School "thereby benefitting the students". That may be so (although the school held HK$1.4bn of cash and investments at 31-Jul-2017), but we cannot conceive any way in which this donation benefits NIF or its owners, who have lost 81.8% of their investment since 31-Mar-2017.

NIF made an identical donation to the same school in 2015, stating in the 2015 annual report: "We wish our humble effort today will reap a bumper harvest of great men for the future society." Maybe even women. And why did they pick HKIS? Who knows? We wonder whether any of the fund's directors' sons (or daughters) have attended this school, or its associated Church of All Nations run by the Lutheran Church - Missouri Synod.

Incidentally, shareholders would be forgiven for doubting the existence of Mr Wong (and we still don't know what the "F" stands for). As Chairman of NIF, he failed to attend the AGMs for 10 years running in 2008-2017. We don't yet know whether he attended the AGM in 2018 as the 2018 annual report is not yet out and we don't know anyone who was in the room. That's a gap in the Listing Rules that should be closed. Each of the annual reports from 2008 to 2017 contained the same excuse that Mr Wong "was engaged in an important business meeting" - presumably more important than the AGM.

The Listing Rules for closed end-funds should not allow companies like NIF to exist. We need wholesale reform of those rules and until then, HKEX and the SFC should stop all further listings under this Chapter. The rules are simply not fit for purpose.

© Webb-site.com, 2019


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