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Sunday, August 10, 2008

ICAP vs icapital: Fund Manager vs Advisory Service Provider

As you may be aware, fellow blogger, Moolah, has been blogging on ICAP and icapital for some time.

For clarity, ICAP refers to the Fund which is listed in Bursa.

Whereas icapital refers to the subscription based / paid investment advisory service which is available in print form or via Internet - http://icapital.biz/english/).

The two are not the same thing, even though they are related, since ICAP fund is managed by Mr Tan Teng Boo, who is also the Managing Director of icapital.


In my opinion, Moolah's two latest postings are very good, extremely thought provoking, and are worth reading:

- http://whereiszemoola.blogspot.com/2008/08/more-on-icapital-transparent-issue.html

- http://whereiszemoola.blogspot.com/2008/08/icapital-how-independent-is-advice-when.html

The reason is because it highlighted very clearly a potential conflict of interest issue.

This has important implications for investors who subscribed to icapital's services for a fee.


In this article, I wish to highlight just one situation where this conflict of interest has arisen.

The situation is when ICAP owned the same stock that icapital has a specific Buy (or Buy/Hold) recommendation on.

The question is - if ICAP owned the stock, and icapital called the same stock a Buy, is this stock worth buying?

Superficially, one would think so isn't it?

After all, ICAP owned the stock.

And at the same time, icapital also called a Buy.

Isn't that's consistency?


However, recent events has shown that this might not be the wisest thing to do.


Because as Moolah has shown in both his articles - earlier this year, ICAP has been selling stocks that they previously owned - like Boustead, Integrax, LionDiv, Poh Kong, etc. - even though the Advisory Service still has a Buy/Hold Call on them.


Macam ini pun boleh?

Why didn't the Advisory Service change their call to Sell?


In fact, you may even have already asked this related question.

Which should happen first? Should ICAP "sell" first, then, "call" a Sell?

Or should icapital do the reverse? I.e. Call Sell first, then, ICAP sells?

(Perhaps some of you thinks that ICAP and icapital can do both at the same time? But is this possible? Chances are if they try to do both at the same time, the result will be ICAP sell first, and icapital advise later ... )

So, what should it be? Sell first / call later? or Call first / sell later?


Notwitstanding this question, another question to ponder is are there any laws that says that this is wrong?

Or is this action - Sell a stock, when Advisory Service says Buy - is simply not wrong?

Well, this situation is not exactly new.

It has happened many, many times in the past.

It has also happened many, many times not just for ICAP/icapital, but at many other places.

And not just in Malaysia, but also in many markets around the world.

In fact, many brokers who manage monies on behalf of their clients (e.g. OSK, etc.) also provides investment advisory services.

And many, many times, the broker side will Sell the stock, when, the advisory side says Buy. And vice versa.

Is there anything wrong with this? If you accept it is wrong, what actions should be taken and done? By whom? When?


So, coming back to icapital - in the past, icapital claimed and explained more than once, that their advise is actually for a different purpose and a different time-horizon. For example, if I'm not mistaken in my recollection, they claimed their advise is fundamental based intended for value investors (where lower prices usually represents better value) who intends to own stocks for a long-term (where price falls are usually a friend than an enemy).

Whereas, the ICAP fund works differently. The purpose of the ICAP fund is maximize shareholder value, i.e. if the Manager thinks prices will fall, then, they will sell, since trading potentially enhances the Fund returns if done properly. In other words, ICAP fund should not claim to be value investors who intends to own stocks for the long-term ...

But unfortunately, ICAP Annual Report didn't say this. If you look at the Chairman's Letter (page 1) dated 11 June 2008 in the Annual Report, he said this "Your Fund is a value investor, and hopefully its owners are as well." And this ... "As I explained in last year’s report, I have constantly referred all of you as share owners and not shareholders. Holding implies something transitory while owning implies a more permanent state of affairs."

Hmmnn ... so, how does one reconcile these 4 things - (a) what ICAP Chairman says, (b) ICAP's Selling, (c) icapital's Buy Call and (d) icapital's explanations to justify its buy call?

And let's not forget our entire industry practices too, as well as global practices ...


Can we rely on our regulator to fix this apparent anomaly up?

For example, has icapital crossed the line that allows regulator to take action?

And what about icapital subscribers - have they suffered losses holding on to their stocks because icapital continued to call them a Buy/Hold?

They paid good money for the services.

Should all of these subscribers be made aware of this apparently anomalous action - that when icapital calls a Buy, the ICAP fund can also be actually Selling the same stock at the same time?

Should regulators insist on this "Disclosure"?

Would the public accept such Disclosure?

Or whould they think it is "too confusing"?

If the public thinks it's "too confusing", is this a bad thing?

Can such an anomaly ever be fully resolved by our regulators alone?


Or do we have to simply accept that "Buyer's Beware"?

I.e. the "onus" is on the "newbies" to smarten up themselves through hard and expensive lessons and tuition fees to Mr Market, without additional disclosure?


To me, the regulator and the industry should take the lead to resolve this apparently contradictory action.

It is obvious that this is an industry policy issue.

Or a policy neglect issue?


Despite what has happened, even today, here are still some investors - especially new investors - who are probably unaware of this apparent anomaly.

The "reasonable expectation" is still consistency in Sell Action = Sell Call.

Not a contradictory Sell Action <> Buy Call at the same time.

Especially when the Advisory Service charges a fee for it.


And until the regulator & industry takes positive steps to resolve this, all we can do is to be aware ourselves of this practice.

And to keep repeating and spreading this message around.

And hopefully, noone will say that this industry is full of unethical people, who are always trying to legally steal your money when you least expect it.

That would give our industry a poor reputation.

And that would be bad for business.


The Madviruz said...

The implied need is to segregate advisory role and fund management business.

Unfortunately independent reporting and advisory role are not without vested interest and misinformation intended to misled.

A disclaimer "..makes every effort to use reliable, comprehensive information, but we do not represent that it is accurate or complete. We have no obligation to tell you when opinions or information in xxx Research change apart from when we intend to discontinue research coverage of a company. Facts and views in xxx Research have not been reviewed by, and may not reflect information known to, professionals in other xxx business areas, including investment banking personnel" is the usual escape clause.

It does not assist an investor unless he does his own reading and research to independantly evaluate each report and advise. The path of least resistance is to follow the rumour mill or the media reports and thus falling into the intended trap.

The odds are heavily stacked against the minority independant investor or trader.

Seng said...

Yes, I agree that the path of least resistance for many is to follow the rumour mill, the media, the analyst reports ... which exposes them to fall into the intended trap.

Seng said...

On the segregation topic, the normal defence put up is that the present arrangement appears to have been segregated already, possibly more so (?) than some of the existing broker arrangements.

E.g. ICAP is a separate fund where TTB is not even a Chairman nor a Director. Whereas icapital.biz is a separate company established to provide advisory service.

Of course, the form of the company does not dictate the true substance, in that the same individual may be controlling both in practice.

But if we look at the true substance, then, this is also potentially no different than some other broker organizations who are (1) owned by the substantial shareholder, (2) the substantial shareholder may even be the Chairman and controls the Board, (3) he also controls the advisory service and (4) he also controls the funds management arm at the same time! Of course, the form is to front with different managers under his control.

On the basis of these 4 criteria, wouldn't he appear worse than TTB?

Perhaps something to ponder about ...

Seng said...

My comment on your suggested disclaimer is that it needs to be made simpler and more focused on the consumer, rather than something to be used for the company's benefit as an "escape clause".

As such, such a Disclosure must be championed by the Public or Regulator acting in the best interests of the public.

As a general rule, Disclaimer can be worded to be clear or simple, or it can be worded to be long and vague.

It should be conceptually clear that if it's intended to educate consumer, then, it should be short, simple, clear.

Much depends on the writer and his focus.

Using your example for example, I would phrase it differently to emphasis a different focus:

"... makes every effort to use reliable, comprehensive information, but we do not represent that it is accurate or complete. "

- I would just delete this line. Brokerage house reports (e.g. OSK) are often seen as "expert opinions", when in reality, they are potentially biased opinion.

In fact, in practice, they are almost always biased opinions! :-)

So, to me, it is much better to stress the point that "Please note that since this is our house opinion (and since our funds management owns the Stock), our opinions are very likely to be biased".

In other words, Disclosure should admit the reality, that any one person's or organization's opinion may be biased.


Note that the emphasis is not to protect the organizations.

But rather the emphasis is to educate the consumer.

This is a radical concept because it is simply not seen in Malaysia, not to mention globally.

see said...

ICAP & Capital Dynamics are one & the same. Both are basically one man show: Tan Teng Boo.

Seng said...

Dear "see",

Well, if they are the same as you've mentioned, then, why is it that the SC is unable to prosecute or closed down Mr Tan's operations?

In your opinion, do you think what Mr Tan did - to call a Buy, when ICAP was selling at the same time - wrong?

If it's wrong, with potential loss to those who subscribed and acted on icapital's advise, then, shouldn't the authorities prosecute? If not, why not?


see said...

I'm afraid I don't follow ICap portfolio nor TTB's comments nowadays. But if what you said is true then it was unethical. I'm not sure if it contravened any SC rules, thats something someone should bring up with SC. If it contravened any regulation, I don't know why SC didnt act, maybe they are unaware, as you know regulators are never on the ball.

It would be interesting if someone ask TTB point blank why his words & actions contradict. Just give him a call if you subscriber. I used to work for that guy but that was long ago before ICAP but I do know he was one man show for the newsletter & the asset mgt co. whether a chinese wall is practiced, I don;t know but knowing the size of his ego, he would pretty much like to remain in control of his businesses

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