You may not have heard of a small outfit called Artemis Investment Management Ltd. but you likely have heard of its owner, Miles Nadal – philanthropist, entrepreneur and former CEO of public company MDC Partners, where he resigned after U.S. regulators accused him in 2017 of collecting millions in undisclosed perks.
Artemis manages just two small vehicles that trade on the Toronto Stock Exchange: Citadel Income Fund, worth about $33-million, and Energy Income Fund, even smaller at about $4-million in market value.
They have two things in common over the long term: They are terrible performers, and they are expensive for their investors. And they have another thing in common right now: activist investors who are seeking profit by forcing change.
The Citadel fund is wrapping up a lengthy struggle with Saba Capital Management LP, a U.S. investor that snapped up 20 per cent of the fund’s units before going public with its complaints in February.
Meanwhile, Toronto’s Symetryx Corp., which manages money for one family, announced on May 15 it owned 12.2 per cent of the Energy Income Fund, and wanted to engage with management and the board “to enhance unitholder value.” Its methods could include “unitholder proposals and requisitions,” it said.
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Symetryx’s chief investment officer, Eric Ebert, says in an Sept. 15 e-mail that Artemis has been “very responsive to us and very willing to work with us to maximize stakeholder value in the fund in the best way possible.”
How did one small investment company with two funds get activists targeting each one? A look back at key stats for the two makes it pretty obvious.
The two Artemis vehicles are what are called closed-end funds, meaning that investors can buy and sell their units like stocks, unlike conventional mutual funds, which do not trade on exchanges. However, that structure raises the possibility that the market will value the units at far less than the underlying value of the investments the funds hold.
Hoo boy, was that the case here. The Citadel fund traded at a discount to NAV, or net asset value, of at least 20 per cent per year for the decade Artemis has managed it. The average annual discount topped 30 per cent starting in 2020. The Energy fund’s average annual discounts ranged from 18 per cent to a bit under 28 per cent for the decade, with an average discount of 23.55 per cent in 2022.
The reason for the discount was likely the market’s expectation of substandard future performance. In nearly every year, the Citadel fund’s underlying investment returns underperformed their benchmark on a one-year, five-year and 10-year basis. The Energy fund was a little better, with several instances of beating the benchmarks. However, a remarkable and mysterious 2021, when it returned 2.99 per cent when its benchmark gained nearly 80 per cent, will likely keep its numbers underwater for a long time.
You’d think Artemis might consider firing the investment manager, another small outfit called Vestcap Investment Management Inc. Except Vestcap is a related company – the funds’ annual reports say Vestcap “is a corporation under common control” with Artemis.
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The top two executives at Mr. Nadal’s private investment company, Peerage Capital Group, were directors of Vestcap until 2019, says Deirdre McMurdy, the chief spokesperson for Peerage Capital Corp. records show Mr. Nadal was a director of Vestcap from Jan. 1, 2011, to Nov. 24, 2014, and Ms. McMurdy says he currently indirectly owns a 33-per-cent stake in Vestcap.
The documents show Artemis and Vestcap have collected sizable fees for their management of the two funds: a total of $11.2-million from 2014 to 2022, with nearly 80 per cent of that coming from Citadel.
And as the funds shrink in size from their poor performance, investors pay more. The management expense ratios, a measure of costs that get deducted from a fund’s assets, have been rising. Citadel’s MER was 3.12 per cent in 2022, while the Energy fund’s MER, which has been over 4 per cent since 2018, hit 5.82 per cent in 2021.
The numbers help explain Saba’s rabble-rousing. When it announced its 20-per-cent stake, it opined that the best way for Citadel unitholders to achieve the value they deserved would be to wind up the fund. Its attempts to call a unitholder meeting to vote on the windup proposal were unsuccessful.
Citadel said in late August said it would allow investors to cash out a portion of their units – up to 40 per cent of the fund – at the NAV, rather than at market value. But that wasn’t the final word. On Sept. 14, Citadel settled with Saba and announced a new offer: It would allow the redemption of 70 per cent of units outstanding. Saba would support and vote for Citadel’s new strategic plan, which would see the fund invest solely in Canadian residential real estate properties.
To review: Saba spent nearly seven months saying Artemis and Vestcap had “destroyed” the value of the fund and “entrenched” themselves as managers. And now the new plan is to allow the managers to continue, but move away from investing in publicly traded stocks and bonds and get into the most illiquid, overpriced asset in Canada.
Saba, which will make a nice return on its investment, is required to tender all its Citadel units in the redemption offer, so it won’t stick around for the long term and go along with Plan B. But here’s a couple hopes: One, that as many retail investors as possible can get out of Citadel.
And two, that Symetryx takes things a step further and puts the Energy Income Fund out of business, unlocking the NAV for every retail investor currently stuck with the fund’s depressed unit prices. The best outcome is a wind-up to both of the Artemis two funds, because Mr. Nadal and his cohorts have no business managing money for Canadian retail investors.
With a report from Stephanie Chambers