Recommendation: Vote AGAINST the Argo Group Share Buyback Proposal

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Andreas Rialas, ARGO, Argo Group, Kyriakos Rialas, Michael Kloter, Rule 9 Waiver, share buyback, shareholder activism, shareholder value, The Argo Fund

Here’s the recent RNS from Argo Group (ARGO:LN), notifying shareholders of a March-3rd EGM seeking authorisation for a £2 Million Share Buyback & Rule 9 Waiver. [Here’s the actual EGM Circular]:

– Argo Group’s AUM has now declined by a cumulative 85% (to $166 million), the $3.5 million Argo Local Markets Fund remains its only new fund-raising (since the credit crisis), it continues to write-off virtually all the management fees accrued & owed (now totaling $6.2 million) by the Argo Real Estate Opportunities Fund, and it’s also tied up a majority of shareholder funds in illiquid loan & fund investments. Management’s obvious inability to stabilise & increase AUM, plus its wilful neglect of shareholder value, are clearly to blame here for the 50% collapse in Argo’s share price just in the last 3 years.

– Judging by local press reports (for example, here & here), Andreas Rialas originally received a substantially higher offer for Argo’s Indonesian refinery investment (TPPI), but ended up spending another couple of years negotiating (or refusing to negotiate) with Pertamina…to ultimately realise a far lower exit price for fund/shareholders. [Which is consistent with a near-25% write-down (in the last interims) of Argo’s stake in The Argo Fund].

– Pursuant to this letter, in 2014/2015 I introduced and/or referred to Andreas Rialas a number of trade & financial buyers who were interested in potentially acquiring Argo Group, its asset management business, or its fund investments. Since then, I’ve had no meaningful feedback or reason to believe he/Argo have seriously engaged with any of these potential buyers.

– The EGM Notice process was both unprofessional & inappropriate: While most investors learned of the Share Buyback from Argo’s RNS (released after close-of-business on Mon, Feb-8th), the Notice was actually posted the prior week & received by some shareholders on Sat, Feb-6th.

– The Indonesian sale & proposed return of capital is Argo’s first major value-creation event in a number of years. Some level of (prior) consultation with a representative group of external shareholders, plus some additional time to adequately consider & discuss the proposal, would have been appropriate.

– Kenneth Watterson is a director since Argo’s original 2008 Admission. As is David Fisher, who’s also been an AREOF director since 2010. While Michael Kloter has a much longer history with Andreas & Kyriakos Rialas, Absolute Capital Management (which acquired Argo back in early 2007), not to mention Florian Homm (also, see here & here)…and received a post-Admission bonus, while billing Argo for legal services over the years. In aggregate, these directors have earned an estimated $1.4 million in total remuneration from Argo. I must say, I struggle to understand how they still qualify as Independent Directors..?!

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Argo Group…Time for a Sale and/or a Wind-Down?

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Andreas Rialas, ARGO, Argo Group, Church House Investment Management, David Fisher, Guy Thomas, Jeroen Bos, Kenneth Watterson, Kyriakos Rialas, Michael Kloter, shareholder activism, shareholder value, tender offer

Here’s a copy of a recent letter to Andreas Rialas of Argo Group (ARGO:LN) – the letter speaks for itself…

‘August 29, 2014

FAO: Andreas Rialas, CIO

Cc: Michael Kloter, Chairman
      Kyriakos Rialas, CEO
      David Fisher, Director
      Kenneth Watterson, Director

Argo Group Limited
33-37 Athol Street
Douglas
Isle of Man
IM1 1LB

Dear Andreas,

Further to our prior conversations, I would like to confirm I now speak for 15.6% (in aggregate) of Argo Group’s outstanding shares. Excluding insiders, this represents 25.0% of Argo’s external shareholder base. Supporters now include well-respected funds and investors such as Church House Investment Management, XXX Capital Management, Guy Thomas, and over two dozen other Argo shareholders.

Argo Group – 2013 Interim Results

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% of AUM, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Globalworth Real Estate Investments, intrinsic value, Kyriakos Rialas, Price/Cash, The Argo Fund, TPPI

You may want to first read my preview of Argo Group’s (ARGO:LN) interim results here.

My estimate for end-Jun Assets under Management (AUM) was $333.8 mio. Actual AUM was reported at $308.0 m – down (5.6)% from end-Dec, but up 1.9% y-o-y. The H1 return estimates I noted for The Argo Fund (TAF), the Argo Distressed Credit Fund (ADCF) & the Argo Local Markets Fund (ALMF) were all spot-on. [And my Argo Real Estate Opportunities Fund (AREO:LN) estimate was derived directly from their published results]. What tripped me up was the Argo Special Situations Fund (SSF) – its (20.6)% H1 NAV decline was rather unexpected… That’s a loss of nearly $23 m, which accounts for the vast majority of my AUM over-statement (net redemptions presumably explain the rest).

Even with more info to hand, I’m not sure I would have anticipated this kind of result anyway. Here’s management’s explanation: ‘The main contributors to this position were the decline in share price of AREOF; a write down in the value of an investment in the Greek telecommunications company, On Telecoms; a higher valuation ascribed to the investment in TPPI.’ Now, let’s consider each of those components:

– The PT Trans-Pacific Petrochemical Industries (TPPI) gain is no great surprise – TPPI was also the main performance contributor for TAF & ADCF this year.

– While AREO’s price decline (from EUR 0.0522 to EUR 0.02) may seem fairly irrelevant at this point, the company’s share count is high & Argo (Group & funds) own a 73.9% stake. [NB: Argo Group itself only owns a 1.8% AREO stake]. That still translates into a meaningful write-down. If I assume SSF’s the only Argo fund invested in AREO – and I’m not at all sure that’s a correct assumption – by my calculation, its loss could total up to $18.8 m.

– As regards On Telecoms, the Greek telecommunications company, it was my understanding that SSF’s predecessor funds (ACPF & AHL) had already recorded a complete write-down on their investment in the company.

Considering the points above, I’m puzzled how SSF lost almost $23 m..?

Argo Group Interims – A Preview

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% of AUM, Andreas Rialas, ARGO, Argo Group, Argo Real Estate Opportunities Fund, AUM, Cyprus bail-out, intrinsic value, Investor Relations, shareholder activism, shareholder value, The Argo Fund

I expect Argo Group (ARGO:LN) will be releasing interim results in the next week or so. I’ve no desire to be a hostage to fortune, but I think we can make some intelligent assumptions about their results – and there’s an important issue I want to highlight:

Let’s begin with Assets Under Management (AUM). First, I obviously have no idea re subscriptions/redemptions! But rightly or wrongly, my impression is that changes in Argo’s AUM have been driven primarily by performance, at least in the past couple of years. [NB: See here – at our meeting earlier this year, Andreas Rialas committed to better disclosure re changes in AUM – breaking out gross subscriptions, performance & gross redemptions is standard practice for the majority of Argo’s listed peers].

I also have no insight into the performance of the Argo Special Situations Fund (SSF) – let’s assume AUM remains unchanged. We then have the Argo Real Estate Opportunities Fund (AREO:LN) – which last reported an adjusted NAV of EUR 68.5 mio. For Argo’s other funds, I’ve come across conflicting reports of YTD returns – I prefer to be conservative, so I’m fairly confident we’ll see the following returns (as of end-June 2013), at a minimum:

UK Asset Managers & Argo Group

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% of AUM, Andreas Rialas, ARGO, Argo Group, asset managers, Charlemagne Capital, Dolphin Capital Investors, Ex-Cash Ratios, F&C Asset Management, Impax Asset Management Group, Investor Relations, Kyriakos Rialas, Miton Group, NAV discount, The Argo Fund, Third Point, UK

In April, I took a closer look at the universe of UK-listed asset managers. A key piece of research was a (relatively) simple analysis which focused on financial stability & market valuation – this study also offered a useful peer comparison with Argo Group Ltd. (ARGO:LN) (& see this recent post).

Frankly, the numbers (plus the rest of this post) speak for themselves, but let’s have a taste of the main highlights:

Name	Ticker		Net Cash/Inv as % of Mkt Cap
F&C Asset Management	FCAM		(23)%
Liontrust Asset Management	LIO		3.9%
Henderson Group	HGG		6.2%
Aberdeen Asset Management	ADN		7.9%
Jupiter Fund Management	JUP		8.4%
Polar Capital Holdings	POLR		16%
Ashmore Group	ASHM		18%
Miton Group	MGR		26%
Schroders	SDR		34%
Man Group	EMG		55%
Impax Asset Management Group	IPX		59%
Charlemagne Capital	CCAP		64%
Median			17%
Argo Group	ARGO		175%

It’s encouraging to see the entire sector now enjoys robust financial health. Only F&C Asset Management (FCAM:LN) is in a net debt position – all other companies sport net cash & investments on their balance sheets. But it’s also clear this healthy financial position is not the key driver of market valuations – for Argo’s peer group, net cash/investments only represents a median 17% of market cap. On the other hand, Argo’s $23.6 mio of net cash/investments amounts to a whopping 175% of its market cap.

Cyprus & Argo Group

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Andreas Rialas, Argo Group, Argo Real Estate Opportunities Fund, Cyprus bail-out, EU economy, European sovereign debt crisis, Eurozone, fiat money, Greenspan/Bernanke put, intrinsic value, Kyriakos Rialas, Lehman Brothers, Price/Cash, The Argo Fund

Obviously, I’ll be returning to Argo Group (ARGO:LN) in greater detail another day, but news of a Cyprus bailout deal has prompted scads of emails & questions to me about Argo. A post is certainly justified…

OK, Cyprus – what a God-awful mess… At this point, years into the European debt crisis, it’s hard to believe EU politicians can attain new heights of stupidity. Whenever politicians: i) do something on the cheap, ii) kick the can down the road, or iii) (perhaps the worst) enforce some obscure point of principle, haven’t we learned it comes back to bite you far more savagely & expensively?

I have to concede the US is pulling ahead of Europe – they’re much quicker to recognize failure & to learn from mistakes. The collapse of Lehman can be ascribed pretty much to one man (Paulson) & his pig-headed intention to prove a point. Oh boy, and what an expensive point it was… Of course, everybody ignored it, lessons were learned & the Greenspan/Bernanke put was accordingly (and infinitely?!) strengthened.

Argo Group – Awaiting Results

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% of AUM, alternative assets, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, asset managers, distressed assets, distressed investing, emerging markets, European sovereign debt crisis, Expected Value, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group’s (ARGO:LN) Final Results should be released shortly (I’ll try confirm the exact date). In my most recent Argo posts, I published two letters I’ve sent to Kyriakos & Andreas Rialas (CEO & CIO, respectively). I encourage you to review both letters before continuing:

Here’s the first letter (from Nov-2012)

Argo’s share price rallied +6.2% in the following week.

And the second letter (from Dec-2012)

This was sent on behalf of myself, Guy Thomas & some other (smaller) shareholders, representing an aggregate 5% shareholding in Argo. The letter focused on a single specific shareholder distribution proposal. ARGO subsequently rallied +6.5% (in the following week). [In fact, the share price is now up an impressive +36% since my November letter. Despite the rally, I believe Argo remains just as compelling an investment proposition – I currently have a 5.4% portfolio stake].

My recommendations & proposal require little (further) explanation, and I expect shareholders will enthusiastically support all efforts to realize & enhance Argo’s intrinsic value. But I will revisit them in the context of an upcoming results preview – plenty of current & prospective shareholders have emailed me about Argo, so I hope you’ll find this useful. Let’s first consider Argo’s existing funds:

Argo Group – A Shareholder Proposal

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% of AUM, Andreas Rialas, ARGO, Argo Group, asset managers, catalyst, distressed assets, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group Ltd. (ARGO:LN) has been a consistent Top 7 holding for me since launching the blog last year. It currently represents 4.9% of my portfolio.

It was among the first handful of stocks I wrote up late last year (here & here). I also included it in my Baker’s Dozen for 2012. I followed up with another detailed write-up in May-12. [btw An asset manager series later that month may add useful context: Parts I, II, III, culminating in a Fortress Investment Group (FIG:US) write-up]. I then briefly revisited Argo in Oct-12 as part of my catalyst series.

I was pleased to note recently my Argo write-ups have actually proved the most popular with readers. Which certainly isn’t reflected in the performance of the share price: ARGO is actually down 20% YTD! Considering the UK market’s progress this year, and based on reader/investor feedback, it’s reasonable to suggest some/all of this price decline might have been avoided…

This compelled me to write to Argo’s management a month ago with a number of recommendations to enhance shareholder value, improve investor relations & disclosure, and to increase Assets under Management. I’m pleased to see the letter would appear to have reminded new/existing investors of Argo’s far higher intrinsic value, and its potential – the share price has subsequently rallied +15%. It also garnered some v useful shareholder feedback & support, which prompted me to send this follow-up letter to Argo last week: