Chalkie taken to task by Carmel Fisher

OPINION: While I am usually reluctant to respond to opinion pieces, I must respond to Chalkie's column entitled "Value creation of free options offer an optical illusion", published yesterday.

The author makes several misleading statements and I resent his attempts to besmirch my reputation by comparing me to the likes of Mark Hotchin, Eric Watson, and Rod Petricevic.

The essence of the article is that investors who have bought Kingfish shares since July 23 when Kingfish announced an issue of free warrants, are foolish and have been bamboozled. In making this point, the author has suggested that Kingfish shares have "suddenly become fashionable", that "the board should have looked at winding Kingfish up" and that the warrants will "destroy value long- term". His comments are misleading and without basis.

It is important to provide some perspective. Firstly, the Kingfish share price has lifted 3 per cent since the Kingfish warrant was announced. This is hardly indicative of "sudden popularity". The author suggests that Kingfish investors have become too enthusiastic because in pushing the share price up, the discount between the Kingfish share price and its net asset value has closed to 10 per cent. Before the warrant issue, the shares were trading at a 12 per cent discount. This is hardly a headline-grabbing improvement.

The author's suggestion that the Kingfish warrants destroy value is just nonsense. The warrants are being issued to all Kingfish shareholders. A warrant gives the holder the right but not the obligation to buy a share in a company at a fixed price. If all the warrants issued by Kingfish are exercised, the size of Kingfish will grow, the manager (Fisher Funds) will be able to invest more funds in preferred companies, and the costs of Kingfish will be spread over a larger capital base.

The warrants give Kingfish shareholders a choice. Shareholders can choose to sell their "free" warrants on the sharemarket at any time prior to the warrants expiring. Some Kingfish shareholders might choose to sell their shares and retain their warrants; others might exercise their warrants.

Fisher Funds will have to earn the right to receive and manage any new capital from the exercise of warrants. This is not a free lunch for the manager, and nor will it necessarily be easy given the magnitude of Kingfish's attractive dividend policy. I am most concerned with the author's omissions. He has conveniently forgotten to mention Kingfish's innovative long-term dividend policy which was announced in June 2009, and which provides Kingfish shareholders with a quarterly distribution equivalent to 2 per cent of the average net asset value each quarter. It is this distribution policy that Kingfish shareholders have become excited about, and rightly so. Kingfish is now one of the highest cash- yielding stocks listed on the NZ sharemarket.

Since the distribution policy was announced last year, the Kingfish share price has lifted 27 per cent and the discount has reduced from 26 per cent to 10 per cent . Now that's a headline- grabbing improvement.

And for the record, Kingfish has not suddenly become popular and I have not "rediscovered my stockpicking mojo". Kingfish has been a popular investment for six years, and I have never lost my mojo!

The Kingfish net asset value including dividends has increased 28.8 per cent since inception (March 2004) - double the performance of the NZX 50 index. The author is quite wrong to state that "every dollar put into a listed investment company becomes worth 80 cents". In the case of Kingfish, $1.00 has turned into $1.20.

Finally, I find it frustrating that the author expresses such strong and to my mind, inaccurate opinions under the cloak of anonymity. If for example the author is a competitor then some of his comments can be explained as rivalry, one-upmanship or even envy. I am happy to put my name to my, equally strongly held, opinions.

Carmel Fisher is managing director of Fisher Funds, a specialist fund management firm which manages the Kingfish Limited portfolio under a management agreement. The views expressed are her personal opinion.

Chalkie replies: None of the above answers the basic issue that if new money is put into the fund because of the option issue it will most likely be worth 20 per cent less the day after, that loss of value being spread over all shareholders.