Friday, September 23, 2011

Conflict Of Interests In Investment Advisory

Yesterday I had questioned: How To Expect Proper Governance With All These Conflict Of Interests?

When Swee Joo announced that it is to be delisted on 26 Sep 2011, this reminded me of a conflict of interest between iCapital And Swee Joo that I had written back on July 2009.

I had always disliked the the conflict of interest between iCapital the fund management and iCapital the investment advisor.

As a fund manager, iCapital was already making money. Why the need to be an investment advisor at the same time? Why?

How can one trust the integrity when the same said company manages fund and gives investment advice at the same time? Fund buys, investment advisor gives advice to buy the stock at the very same time. A rather tacky issue, yes? How can one trust if the company is giving a pure independent and trustworthy investment advice?

Let's look back at iCapital And Swee Joo incident once more and the said conflict of interest.

Now let's look at 2008 annual report announced on 11th July 2008, Annual Report 2008.

  • In the year ending 31 May 2008, your Fund made a number of purchases. New investments were Boustead, Hai-O Enterprise, Suria Capital, Swee Joo, Telekom Malaysia and TM International.

And here is the snapshot of the portfolio as at 11 June 2008. had purchased some 2,083,100 million shares worth some 2,858,552 million. This works out to 1.37.

Now iCapital's 2008 fiscal year runs from 1st June 2007 to 31st May 2008. Somewhere in between these dates, iCapital is said to have invested in Swee Joo at an average cost of 1.37.

Here now is the chart. The top section with all the foot prints denotes the time frame between 31st May 2007 and 30th May 2008. This is where iCapital 'might' have purchased Swee Joo at an average cost of 1.37.

Now Swee Joo was listed in Oct 2006.

First yet of earnings I would use is what Swee Joo reported on Feb 2007. Quarterly rpt on consolidated results for the financial period ended 31/12/2006. Swee Joo made 12.571 million.

May 2007. Quarterly rpt on consolidated results for the financial period ended 31/3/2007 Swee Joo made only 5.043 million. Less than more than half of what it made the previous quarter.

Only these 2 set of earnings and the second set of earnings reported on May 2007, showed a drastic decrease in its earnings.

Would that be considered a 'value' investment'?

Nonetheless, 2 months later, on 20th July 2007, iCapital investment advisory makes a buy for longer term call! And yes, it openly declared the vested interests in the investment report.

Let me reproduce it in full once more.
  • [Updated on 20/07/2007 15:41:00]
    Principal activities: Shipping & related businesses
    Major shareholder/s: Leonard Linggi Anak Jugah,Goodlink S/B, Limar Management Services S/B

    The principal activities of Swee Joo Bhd (SJB), an East Malaysian group that is fast catching the headlines, comprise mainly shipping services, shipping agencies and shipping-related services like haulage, distribution, warehousing, container handling and repairs.

    The shipping services provided by SJB are mainly domestic and some regional routes. Domestic refers to routes between East, Peninsular Malaysia and Brunei and coast to coast refers to Sarawak while the regional shipping liner covers Bangkok, Ho Chi Minh City, Jakarta, Surabaya, and Singapore. Currently, one of the strengths of SJB lies in its comprehensive coverage of the East Malaysian ports. Domestic shipping services contribute the bulk of the group's revenue and earnings. In 2001, SJB formed an alliance with a large global shipper, Evergreen Marine Corp. The tie-up with Evergreen increases its revenue with the trans-shipment of goods from international to domestic routes. SJB is allowed free use of Evergreen's containers for 30 days. Presently, the feeder freight revenue contribution from Evergreen makes up 4.3% of SJB's sales. The group's revenue is primarily denominated in Ringgit, while a substantial portion of its cost is in US$. Unfortunately, the group does not undertake currency hedging. Due to the rise in oil price, bunker costs have been rising but this event affects all shippers.

    The two main 100% owned subsidiaries of the group are, Johan Shipping Sdn Bhd (Johan) and Swee Joo Coastal Shipping S/B (SJ Coastal). Johan, which provides domestic container shipping services, started business in 1983. It offers scheduled shipping services between west Malaysia and Singapore to East Malaysia and Brunei. In addition, Johan also provides regional shipping services to Indonesia, Bangkok, and Ho Chi Minh City. Johan expanded its shipping services to Ho Chi Minh City and Bangkok in 2003. In 2006, Johan recorded a turnover of RM206.5 mln with a net profit of RM20.3 mln. On the other hand, SJ Coastal provides scheduled services between the various towns in Sarawak. In 2006, it recorded revenue of RM36.5 mln with net profit of RM2.33 mln.

    SJB also provides services such as warehousing, container depot, consolidation and deconsolidation of cargoes at Port Klang, Pasir Gudang, and in the major parts of Sarawak. Repair and maintenance of container services are done at Port Klang. The group has 54 prime movers and 189 trailers. The haulage business had sales of RM8 mln in 2006 and net profit of RM0.11 mln.

    Presently, SJB operates a fleet of 14 container vessels, 10 general cargo ships and backed by 7 support vessels. No single client, market segment or industry dominates in terms of revenue or profit contribution to the group. In 2007, Johan is adding one 713-TEU container vessel, 1 dual-purpose CPO/container barge and 1 general cargo vessel for transporting rice and is entering the Myanmar and East India markets. SJ Coastal would be adding one 2,400-tonne CPO barge in 2008. Asia Bulkers Sdn Bhd, which mainly transports palm oil products and logs, will be adding one 7,000-tonne product tanker, and 2 sets of tug and CPO barge in 2008.

    Conclusion & Advice

    Imagine a company that has proven management, earnings that have grown rapidly and are expected to continue growing rapidly and with some of its businesses enjoying strong market positions, how much would you be willing to pay for such a company? Although the shipping business is capital intensive and the company has high borrowings, the current market valuation of RM278 mln for SJB seems to be on the low side. Hence, i Capital rates Swee Joo a Buy for the longer-term.

    Disclosure of interest (required under the Securities Industry Act) : The publisher and associates have an interest in Swee Joo.
The key issue for me is the disclaimer.
  • The publisher and associates have an interest in Swee Joo.

With just two set of quarterly earnings. with the second set of quarterly earnings showing a huge decline in earnings, iCapital investment advisory makes a bold buy call on Swee Joo.

Was the buy call from the investment advisory really justifiable, was it a truly independent investment advisory or was it influenced by the fact that the publisher and its associates have vested interests in the stock?

Think about it... the stock, purchased the stock between 31st May 2007 and 20th July 2007 then the investment advisory quickly issues the buy call!

With Swee Joo announcing it would be delisted next Monday, one would be wondering what happened to's stake in this stock.

Their cost of purchase was rm 2,858,552. (Bought sometimne between May-Jul 2007)

They reported they dispoed the stock in their Annual Report 2010.

Disposal value was rm 1,005,659.

Loss from disposal was rm 1,852,893.


This posting is not to make a mockery of iCapital's loss but to stress on the conflict of interest between an independent investment advisory and its fund managing business.

Like I said, I dislike such conflict of interest. I do not like to see an investment advisor making a buy call while its own fund management had already bought a substantial stake in the stock.

In Swee Joo's case, the buy call made on July 2007 was so questionable. It was a newly listed stock and there wasn't much financial evidence that suggested it was worth an investment. All it had was two set of quarterly earnings, with the second showing decline in earnings. But yet iCapital's investment advisory deemed it fit to issue a buy call. Was the call influenced by the fact its publisher and associates had vested interest in the stock?

And what about the research reports we read daily? All the buy calls. Are the calls truly independent or do they also carry the same conflict of interests?


M.A. Wind said...

I admit that this was not one of their best. A company that just listed, and added to that, from East Malaysia, where companies are in general more tricky than in West Malaysia. They definitely should have handled this better. For the conflict of interest, they are also handling private accounts (for a long time already), from clients and may be even from themselves, not sure about the last. At least they noticed the conflict of interest. Yes, I know you are not keen on iCapital.... :)

Started to blog about the more juicy bits of the Maybulk/Posh case, hope you like it, this one and the next two should be interesting, I hope:

James said...

Good job

Moolah said...

Mic: Guilty! :P

I seriously think this whole issue could be easily avoided, ie iCapital should just refrain from giving direct investment on stocks.

Why should they bother?

ps: don't worry I did read that article on Maybulk. Good post!

ps/ps: I am also not a fan. Dislike the lack of transparency on their 'marketable securities'.

Big Sea said...

Conflict of interest (buying 1st and then recommending to subscriber) worries me.

What worries me more is how ICAP derives Swee Jee to be a stock worth holding ! They seriously belive in Swee Joo, that's why out of so many stock that they recommend, they own this one. I am a sharehold of ICAP close end fund.

lmenwe said...

lll now only I know that the integrity of Mr. Tan is questionable. I have plan to increase my own stake in Icap but after your post I think it's better that I depend on myself. Thanks a lot Moola. Keep on posting the ugly side of Malaysia Corporate Governance.

lmenwe said...

It seems that Mr. Tan's integrity is questionable. Thanks a lot Moola. Keep on posting the ugly side of Malaysia Corporate Governance.