Weiss Korea Opportunity underperforms but long-term record remains intact – in its report for the full year to 31st December 2018, Weiss Korea Opportunity (WKOF) reported that the NAV of the company increased by 29.4% on a total return basis. The reference benchmark, the MSCI Korea 25/50 Net Total Return Index returned 32.6% in GBP.
The share price in creased by 30.5% on a total return basis over the same time period. Since launch in May 2013, the company has increased by 104.1% (total return), compared to an index returns of 63.0%.
“We are hedging many geopolitical risks by buying credit default swaps when they seem priced at levels that seem cheap relative to the insurance they provide” – Weiss Asset Management LP (the “Investment Manager”)
The investment manager pointed out that the South Korean stock market overcame numerous negatives to achieve exceptionally high returns in 2017, particularly on the geopolitical front. The South Korean stock market and the South Korean economy shrugged off all of the troubling news to achieve the best performance of any major market in 2017. (GDP grew 3.1% in 2017, which may have contributed to equity returns.) Despite the risks, credit default swaps on South Korean sovereign debt are cheap. With board approval, last year the manager bought South Korean sovereign credit default swaps as well as out of the money South Korean index puts to protect their shareholders from certain extreme risks. As with any form of insurance, these hedges will be a drag on performance during normal periods (and will have contributed to the underperformance of the fund in 2017). As of end-2017, the company owned South Korean credit default swaps with a notional value of approximately £74 million and a market value of around £1 million; the market value of the index puts was about £0.1 million.
Realisation opportunity
During the year under review, the company offered shareholders the opportunity to elect to realise all or a part of their shareholding in the company. Approximately 8.6% of ordinary shares were submitted for realisation. On 15 May 2017, the company’s portfolio was divided into two pools: a continuation pool and a realisation pool. Once divided, the company carried out an orderly wind up of the realisation pool, and fully returned the capital in the realisation pool through two redemptions in mid-July and mid-August 2017.
Prior to the realisation, the board declared a dividend of 3.3262 pence per share (period ended 30 June 2016: 2.2416 pence per share) to distribute the income received by the company in respect of the year ended 31 December 2016. This dividend was paid to all shareholders regardless of any election they made under the realisation opportunity.
WKOF : Weiss Korea Opportunity underperforms but long-term record remains intact