Our Canada contributor Martin Ferera wrote last night from Britain where he too is catching up with family:

More from the UK, Israel, Grecce, Egypt, Russia, Uzbekistan, Azerbaijan, Finland, Germany, Italy, Sweden, Canada, Norway, Spain, The Netherlands, Hong Kong, India, Turkey, Japan, Argentina,The Bahamas, and the USA. And we have a new stock pick which you cannot buy until tomorrow as it is British!

Fund-amentals

*I am beginning today's blog with an exposé a reader sent me via Spain from the New York Times, about the crooked way that profits are shared at Pershing Square Holdings (PSHZF), the Bill Ackman-run closed-end fund which copies the moves of his older hedge fund for institutions and fatcats. We have owned PSHZF for about 3 years but have sold half because its performance has disappointed. I had hoped to learn something from Ackman's picks which proved bad. The payout was further nipped by the way the Ackman team was paid for alleged “performance” with a seemingly lowball management fee of 1.5% and 16% of annual profits, vs an industry standard of 2% and 20%. But the devil is in the details, helping me find a fairer fund for 2017, also UK listed, discussed below.

According to the NYT, in the year to end-Nov., PSHZF had lost 13.5% in Net Asset Value (NAV) vs a gain of 7.6% against its benchmark, the S&P 500. Over the 4 years since it was launched, it has gained 20.5%, which sounds better except when compared to the index which was up 67%.

Now here is the rub. The main reason for my selling is those fees, which wind up taking all but 5.7% of the 4-year gain away, because the performance is calculated annually, with no penalty in years where there was a loss, and without a “high water mark” which requires that funds regain losses before taking performance fees again. The newspaper estimates that the fund managers kept about 72% of all the gains over 4 years, mostly to pay staff and Mr. Ackman. In fact, despite the name, the fund was not hedged against losses—they were paid by by investors in PSHZF.

Under pressure from shareholders, the fund has now changed its rules, with effect from 2017. There will be no performance fee if the gain is less than 5% higher than the benchmark, the S&P 500. However, in years when PSHZF beats the S&P it will take not 16% of the gain, but 30%, which will not be much compensation for the losses of the past 3 years.

*We have found a sui generis and more generous closed end fund here in London. It was discovered by our Canada reporter, Martin Ferera, but I have nailed down from London that is is accessible to US investors and not subject to the evil Passive Foreign Investment Trust taxes (imposed on behalf of the US fund industry by 'Saint' Ronald Reagan.) This triggered switches to lower-cost exchange-traded funds rather than PFICs.

This latest recommendation is the result of the quirky UK fund buying a beaten down share of UK firm Sports Direct, which last spring was revealed to have treated its part-time warehouse employees unfairly by a newspaper campaign. The fund, called Aurora Investment Trust plc, whose parent Bahamas open-end fund had earlier made out like bandits in Sports Direct, loaded up on Sports Direct when its share took a hit. After a few weeks of further investigative journalism it turned out that Sports Direct's competition was also underpaying warehouse workers, and the pressure came off and the stock rose. Martin thinks this was brilliant.

London-listed Aurora had only just been acquired by the parent group, Phoenix Asset Mgm Partners, from the hapless Mars Asset Mgm Group which had lost money for years. This was a bit over a year ago. Mars was paid with shares not money. Buying the Mars listed fund was intended to provide on-shore individual investors like us with a change to gain from Phoenix's investment smarts. The new managers formally launched only in Jan. 2016 and then did two capital raising efforts to build up the assets under management, AUM. Phoenix has a dozen in-house analysts and uses only their input, not brokerage research. Phoenix was founded in 1998 in Barnes, a middle-class area of west London by Tristan Chapple but its chief manager now is Gary Channon.

Phoenix is a PFIC under US law and was founded by Warren Buffett-fan Chapple and listed in the Bahamas in 1998. It seeks to hold about 12 to 20 holdings (concentrated, like Ackman's fund) and hold for about 5 years (unlike Ackman.) All are London-listed companies, making this a more global investing-style vehicle than Pershing which is very North American. Aurora holdings include UK global firms like GlaxoSmithkline (GSK, which we own), Diageo (DEO) and Tesco (TESO) (both of whose ADRs we have owned in the past.) Pheonix has has about £600 mn under management. It charges zero management fee, only a profit share.

Mart is keen on the Sports Direct move because its East End barrow-boy managers Mike Ashley and Keith Helland beat the profitability levels of Amazon. I am also impressed with how Aurora and Phoenix managed the Brexit vote, going in with about a quarter of their funds in cash. They then bought heavily in a sector that crashed after the vote, real estate, loading up on Barratt Developments and Bellway Homes. They also bought a beaten down bank under government control, Lloyds—but not the Royal Bank of Scotland whose $-denominated non-cumulative preferred shares we dote upon. (They do not trade in London so it is not able to buy them under its prospectus.)

In its near one year of operations, Aurora IT which trades on the pink sheets as AIVTF has gained a bit over 5% while its benchmark, the FTSE all-share index, gained 12%. So this is a moment when the management compensation moves into focus. In years where it beats its benchmark in NAV (which includes dividends and buybacks and for which we do not yet have year-end numbers but they will almost certainly be negative) the managers will eventually get a 33% fee out of the outperformance of NAV. This is paid in shares not pounds sterling to them and then they must maintain their outperformance over the following 3 years to avoid a clawback of those sums to the rest of the shareholders. This is a 'high water mark' in fund terminology. The fee for outperformance is limited to 4% of the total AUM (vs 30% now at Pershing) and the maximum loss of fees for underperformance is 2% of AUM (vs zero at Pershing).

Besides real estate and builder firms, Lloyds Bank, and UK multinational corporations, Aurora has oddball placements about which I know nothing, Vesuvius, an engineering firm, financials operation Randall and Quilter, and Headland, a maker of carpets. It also invested in the pub group Wetherspoon, subject of a favorable article by 'Bagehot' in the current double issue of The Economist, praising its good management and new-mode pubs where you can eat and chat even if you are neither drinking alcohol nor male. (Old-mode ones are shuttered all around Mudchute Manor, two more since Sept.)

The Aurora share closed on Christmas Eve at GBX 173, while the NAV was 172. (GBX stands for British pennies, in which UK shares are commonly priced.) So it is barely over NAV. You should not buy until Wednesday morning when London will be open, if briefly.

*Our play on Argentine recovery, GlobalX Argentina ETF, ARGN, will be hit today after the sacking of Alfonso Prat-Gay as finance minister yesterday. He became the scapegoat for the failure of the Macri government to achieve growth in the year 2016 after the latest honest numbers show there was a 4% drop in output from 2015 despite El Presidente's promises . The central bank resisted cutting interest rates for fear of inflation, and Prat-Gay was unable to persuade it to reverse course.

*Founder Tom Herzfeld has bought just under 9% of the outstanding shares of Herzfeld Caribbean Fund, CUBA. We sold when the talks with Castro set up by the Pope pushed CUBA to a huge premium over its NAV. But after the Trump victory and the hard slog of real dealings together it fell to a 10%+ discount at ~$6.75 when NAV was $7.50+. So Tom may be right that it is a good time to buy back CUBA. He is buying for long-term gains according to what he told the US SEC.

*Canadian General Investments, thanks to a stronger loonie, gained over 19% YTD in NAV making it the 8^th best member of the US Closed-end Fund Assn. (CEFA) but not as good as gold fund ASA (sold too soon). But CGI still trades at a record 31.7%+ discount to its NAV of C$28.17 at a mere C$19.23. It trades south of the border in the USA as CGRIF. It is closing the year 14.7% in cash.

*A final fund note. Former Western Assets EMD shares are now showing in my account as Western Assets ESD. It is a bad time of year for back-office accuracy and speed.

Drug Stocks

*The latest word from Gali Weinreb at the globesIsrael.com website is that TEVA is only a side show in the US 20 state attorney-general investigation of generics price fixing. He says the Heritage Pharma staffers shopped Mylan for price fixing and only one email mentions a chat with another generics maker in the case of a diabetes drug, the only one where TEVA might be implicated. An Israeli legal expert from Barnea & Co, Dr Zvi Gabbay, informed the globes writer that both defense and prosecutors have an interest in doing a deal as trials by jury “can go wrong” for either.

Oil and Gas Deals

*Delek Group (DGRLY) has closed on the sale of two offshore fields, Tanin (crocodile) and Karish, which are sold to Greek private company Energean Oil & Gas, including also the stake of US firm Noble Energy of Texas. It is unclear how the deal will be accounted for under Israeli GAAP, according to the DGRLY release.

Delek also invested £42.77 mn, about $52.68 mn, in London AIM-listed Faroe Petroleum, an oil and gas exploration company operating in UK and Norwegian North Sea waters. It currently produces 9000 barrels of oil equivalent (BOE) per day which will be doubled with new investment from Israel. Seller was Dana North Sea Oil & Gas Exploration.

Moreover Delek and Noble think the Leviathan offshore deposit, for which they had to sell Tanin and Karish under Israeli competition rules, on which drilling is due to start in Q1 2017, may hold oil as well as gas, at lower strata.

Finally Delek said it is still continuing talks on providing gas from Tamar to the Shorouk LNG plant in the Egyptian Nile Delta.

*BP plc (BP) did a complex deal in Azerbaijan where its joint venture partner AIOC signed a preliminary contract in Baku with the state company OSCAR to develop an offshore field in the Caspian Sea which holds 3 bn BOE called Azeri-Chirag-Gunashu “super-field. BP is operator but other oil companies with a stake in this big one include Chevron and Exxon (USA), Statoil ASA (Norway), Itochu Oil & Natural Gas Coand Inpax (Japan), Videsh Ltd (India), and TPAO (Turkey).

Tech

*Mail.ru in which South African Naspers (NPSNY) holds 29% will become a joint venture partner of PJSC Megafone of Russia in Q1 which will enable a cash out by mail.ruchief Boris Dubrodeev and his partners from USM Holdings led by Alisher Usmanov of Uzbekistan. They will collect $740 mn from Megafone for combining the networks and cooperating in collection and analysis of telco data and peddling games, ceding 63.8% of the shares for a near 25% premium. Megafone has a partner from the west already,Telia of Sweden. It is unclear if NPSNY will remain a minority partner with Megafone. It already accepts being a 34% partner in Tencent (TCTZF) of Hong Kong. This autumn Naspers bought a 36% stake in a new Indian travel website by cobbling together a jv ofmakemytrip with its Ibibo Group. But Russia is a tougher market. We own both NPSNY and TCTZF.

*In addition to the USA and Germany, Nokia (NOK) is also suing Apple in its Finnish homeland plus the UK, Italy, Sweden, Spain, the Netherlands, Norway, Hong Kong, and Japan over AAPL's failure to follow up on an earlier patent infringement out-of-court settlement of 2011 covering patents in a case brought in 2009. NOK says first that Apple has not renewed the contract for $720 mn signed then. Moreover, NOK having bought out Siemens from their jv last year, and France's Alcatel-Lucent and Withingsin 2016, it now owns 3 further intellectual property portfolios which it says represent euros 115 bn in R&D spending over the past two decades. These include display, user interface, connectivity, software, and video-coding tech which were not covered in 2011 and were, NOK claims, violated in all 11 countries. Apple in fact immediately cut its royalty payments after Nokia bought Withings, banning its line from the Apple Store, to target NOK. Withings makes a light-weight alternative to Apple Watch and a fitness tracker.

Apple says that by transferring its patents to patent assertion entities (PAEs or patent trolls) NOK is trying to charge outrageous license fees for essential Internet products where royalties are limited to FRAND (fair, reasonable, and non-discriminatory terms.) Apple is particularly exercised about 40-odd lawsuits brought by Acacia Research which Apple says violate FRAND. However there are legal experts arguing that FRAND does not apply to the later technologies as Apple claims.

Last year NOK sold its mapping software system, HERE, to German car makers Mercedes, Audi, and BMW for euros 2.55 bn. Now they in turn are selling a 10% stake in here to a group comprised of NavInfo of China, our Hong Kong-based Tencent, and Singapore sovereign wealth group GIC. TCTZF is competing with google maps in this function.