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.

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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.

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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?

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

Why?

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.

Huh?

Macam ini pun boleh?

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

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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?

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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?

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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 ...

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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?

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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?

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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?

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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.

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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.