Summary

  • Current management have destroyed shareholder value through poor performance and excessive fees resulting in a large discount to NAV.
  • Shareholders can recommend that the board replace management as part of the annual proxy vote, which would likely lead to a narrowing of the discount and gain in share price.
  • The board recommends against replacing the current investment advisor because their fees and performance have been better than a few of the worst-performing funds in the market.
  • The “we are not the worst” rationale is laughable and shareholders should vote to replace the current advisor, which has massively underperformed technology sector benchmarks and charged excessive fees.

I’m a current shareholder in Firsthand Technology Value Fund (NASDAQ: SVVC) and submitted a 14a-8 shareholder proposal so that shareholders may vote on this year’s proxy to have the board undertake a search to replace the current investment advisor, Firsthand Capital Management, Inc. (“FCM”), which is run by Kevin Landis. In a recent article, another author noted the opportunity for a shareholder vote to replace FCM. This article reviews the proposal and provides a rebuttal to the board’s recommendation that shareholders vote to keep FCM as investment advisor.

In my opinion, the board of SVVC and especially the so-called independent directors (Greg Burglin, Mark Fitzgerald, Kimun Lee, Nicholas Petredis and Rodney Yee) have not met their fiduciary duty to shareholders since they have not taken any action since inception of the fund in April 2011 to address FCM’s ongoing poor performance and excessive fees as detailed below.

For example, the chart below shows the change in market capitalization of SVVC since inception based on current outstanding shares and an adjustment for dividends. FCM has effectively destroyed about $125 million in shareholder value. In comparison, if the fund at inception were simply invested in the Nasdaq 100 Technology Sector Index, shareholders would have seen the fund’s investments increase in value by over 100%.

Source: SVVC 2011 and 2016 Annual Forms 10-K and NDXT

This represents staggeringly poor performance in a technology sector where an even remotely competent investment manager should have delivered significant gains (note: market capitalization on 12/31/16 was actually only $57 million, but in fairness to SVVC’s management, this would exclude dividends paid in 2013 and 2014, so this has been added back in as if dividends were reinvested in the fund, which results in the dividend adjusted market capitalization of $76 million).

In order to support the performance, the board’s statement in the proxyignores the fund’s many realized losses, such as Gilt Groupe (GILTF) and Invensense (NYSE: INVN), and instead focuses on the few investments that had gains (if you look deep into the 2016 10-K, on p. 31 you will find further disclosures of their poor performance such as an increase in unrealized losses of $14.7 million due to Turn, Aliphcom, Sunrun (NASDAQ: RUN), QMAT and Telepathy).

The Board also identifies three other small funds (XRDCGSVC and TINY) that arguably had worse performance. However, even assuming the Board is correct, outperforming the three worst funds that could be identified in the entirety of the tech market is not really a convincing argument. Let’s concede that SVVC performed better than these three other funds. SVVC then only ranked as the fourth worst tech fund in the market. This is not even a remotely convincing argument in support of FCM’s performance (for better examples of benchmark performance in the technology sector see technology fund rankings such as those available from Cambridge Associates or U.S. News and World Report).

To add insult to injury, FCM has been rewarded excessively for their efforts. The chart below shows the cumulative management and incentive fees from inception through 12/31/16, which equaled over 40% of the fund’s dividend adjusted market capitalization.

Source: SVVC Annual Forms 10-K since inception through 12/31/16

It should be noted that the fee calculation of $33 million above is an estimate based on annual statement disclosures. The $33 million is comprised of ongoing management fees paid quarterly, which cumulatively added to $21.3 million and an estimated incentive fee payment in 2015 of $11.2 million. While management has never expressly disclosed the payment of this incentive fee, it appears from a close examination of the 2015 annual statement that this amount was paid to FCM. I have attempted to confirm such with management and, although they have not denied that the payment was made, they have not confirmed it either. This is typical of the management of SVVC which has a history of braggadocio whenever they have a profitable investment, but almost no disclosure of losses. Similarly, they seem to have decided that it was not necessary to disclose the $11.2 million incentive fee payment, but considered it sufficient that shareholders who scoured their annual statements and were versant in forensic accounting could figure it out.

In order to address the above issues, I have reached out to FCM to discuss concerns regarding performance and fees with no success. FCM rebuffed all suggestions of underperformance, fee concessions or other actions to reduce the NAV discount such as a dividend, tender or large share repurchase. SVVC has refused to respond to certain requests for information under Section 1601 of the California Corporations Code.

Given all of the above, it is frankly hard to understand why the SEC or some other governmental regulator has not taken notice of SVVC and their management. However, as shareholders, we can at least make a stand and let the board know that enough is enough. With new management and reasonable fees, it is likely that shareholders would gain significantly from simply a closing of the large NAV discount (based on management’s estimated NAV of $20.03/share reported as of March 31, 2017, the fund traded at a staggering 60% discount).