iCaptal Addresses the Transparent Issue!

I received a copy of iCapital's newsletter. It was highly interesting for it addresses the conflict of interest issued raised against iCapital.

In its own words, iCapital wrote the following.

• Next week will see the publication of Volume 20 (English edition) of i Capital. To reach this milestone has certainly been a long and very tough 19 years for Capital Dynamics and its managing director. A month after its launch in 1989, an Indian doctor called up to enquire about subscribing but did not as he was worried that i Capital and Capital Dynamics would close shop within months. In 2008, we are still around. After all these slogging years, i Capital and its managing director still subscribe to the simple philosophy of the 3 “i”s – Independence, Intelligence, and Integrity. When our managing director launched i Capital in 1989, one of his main aims was tof provide investors with objective research and analysis. The journey would have been so much easier had we been part of a large financial institution but this would certainly have meant giving up our cherished philosophy of Independence, Intelligence, and Integrity.
  
  Some investors, without their own agenda being transparent, have asked how i Capital can remain independent when we also have a fund management arm. The sceptics and the cynics would say that our fund management arm would buy the stocks first and then recommend the same stocks to the subscribers of i Capital, who would in buying them, then push the share price up. Or we would do the reverse. That is, recommend the stocks in i Capital and then make our recommendations come true with the fund management operations buying and propping up these stocks. These cynics obviously do not understand or pretend not to understand what conflicts of interest really are.
  
  First, we ought to reiterate the fact that we have never received any advertisement income even though numerous potential advertisers have approached us. Secondly, we do not and have not received a single cent of commission or rebate in making our investment advice or in managing the funds. Unlike others that receive all kinds of rebates and or soft commissions, i Capital and Capital Dynamics have always stayed away from these. Even when our analysts go on field trips, we pay for all our expenses even though the organising broker or investment bank were more than willing to foot our bills. Thirdly, because we do not have a stockbroking arm or provide personal and corporate loans, providing independent and objective advice becomes second nature. We do not have to churn clients’ portfolios or offend our large borrowers. Fourthly, the fact that we do not have a corporate finance business, although we could have applied for one, stacks the odds of Capital Dynamics being truly independent extremely high.
  
  In Australia, a provider of financial services (like an investment adviser or fund manager) cannot use words such as “independent”, “impartial”, or “unbiased” if the person receives commissions or “forms of remuneration calculated on the basis of the volume of business” or if the person receives “gifts or benefits” that “may reasonably be expected to influence the person”. The Australian corporation and securities regulations have very tough standards. Yet, based on these standards, i Capital and Capital Dynamics passed them with flying colours.
  
  There is one factor, however, that is the most effective in ensuring that any investment adviser or fund manager is truly independent and acts and thinks with integrity. This factor is always overlooked and its importance always underplayed or scorned at. This factor, which is also our favourite, is long-term investing.
  
  Conflicts of interest arise primarily because of short-term trading or investment horizons that are short-term in nature. Short-term greed very often creates conflicts of interest. Long-term investing inevitably results in independent investment advice or investment decisions based on objective research and analysis. For example, giving a takeover tip to a long-term value investor would be of no help or benefit at all. The same applies to short-term considerations like earnings guidance, forecast, etc. If the long-term investor is going to hold the stock for years, why would a temporary rise in the share price be of any help ? A takeover may lift the share price temporarily but the share price may drop after that. The fact that we have been holding Parkson, etc for years testify to our long-term approach. A long-term value investor like i Capital and Capital Dynamics are more interested in long-term valuations, which make short-term variables irrelevant. As Warren Buffett would say, even if Greenspan were to whisper to him what he was going to do with US interest rate, it would make no difference to Buffett’s investment decisions. In our fund management side, we ACTUALLY decline clients who are keen in short-term investing. All the funds managed by Capital Dynamics are long-term in nature. Of course, if the stocks get overvalued from a long-term perspective, we would sell them. At the end of the day, the approach, the bias of i Capital and Capital Dynamics has always been long-term value investing as we believe that it results in low risk, high return investing.
  
  Our Intelligence comes from our research driven approach. We conduct our own primary research. The section in i Capital called “China on the move” is a good example of this. Even our managing director kicks the tires and conducts his own investment research and analysis, be it on macro economics, industries or specific stocks. The i Capital Long Boom is the result of his years of researching the global economy, for example. Although many are bearish and remain bearish, our managing director views the current global economic conditions differently and sees it as only a temporary pause in a long boom. It is therefore heartening to know that even the IMF has recently revised upwards its 2008 economic growth outlook, forecasts that were only made in Apr 2008.
  
  Our independent structure and our reliance on our primary research make us think and act with Integrity. Integrity is a funny creature. It only works in the long run. It takes a long time to build up and a lot of sincere effort to convince people of your integrity but the benefits will eventually show up. Based on any standards of comparison, the performance of i Capital and Capital Dynamics has been outstanding.

Well I do like to address several issues.

• The fact that we have been holding Parkson, etc for years testify to our long-term approach.

A) iCapital declares that it has been holding Parkson for years. Hmm.. iCapital has vested interest in Parkson and iCapital/Capital Dynamics also recommends a buy on that same stock. I do not know but would one consider this as a conflict of interest in this stock recommendation on Parkson?

B) On April 28th 2008, I blogged the following piece, What Do You Think of ICap's Recent Disposal Of Shares Held? , in which I questioned one main issue. Why did ICapital disposed securities worth 50.999 million during this period when Mr. Tan was publicly quoted as being bullish? I find it hard to accept for someone to be publicly saying he is bullish when his fund is massively disposing a lot of shares! The disposal of shares action certainly contradicted his bullish comments!

Now wouldn't it be very nice if iCapital and Capital Dynamics address this very issue directly?

C) And that disposal of shares now poses a huge question in regards iCapitals self declaration of its long-term approach! How can it preach long term approach now when its fund was doing massive disposal of shares recently?! Wasn't it very contradictory?

The next issue that I would like to address is the following statement.

• Some investors, without their own agenda being transparent, have asked how i Capital can remain independent when we also have a fund management arm. The sceptics and the cynics would say that our fund management arm would buy the stocks first and then recommend the same stocks to the subscribers of i Capital, who would in buying them, then push the share price up.

I am lost here. What does iCapital or Capital Dynamics means by some investors, without their own agenda being transparent?

I find it amazing lah. Someone raised an issue. So why question this person's agenda? Why?

Let's see. By commonsense and logical reasoning, anyone who reads iCapital or Capital Dynamics would surely want to question iCaptal regarding it's independent status since the company conducts a fund management and an investment advisory business at the very same time!

How truly independent can it be in such circumstances?

That for me, would what most readers/investors would want to know about iCapital and I, for one, strongly believes that anyone have the right to question iCapital and Capital Dynamics on this very issue!

And so if they do address the issue, what is iCapital talking about these investors own agenda???

Sigh!

Isn't these investors own agenda is to find out more in order to protect their own vested interest?

Or is iCapital and Capital Dynamics expecting their investors to read without even questioning these issues?

I do not know.

Now, let's consider a scenario where iCapital owns vested interest in a stock and thru no fault of iCapital or Capital Dynamics, the business fortunes of the stock take a drastic turn for the worse.

Now would iCapital be truly independent and transparent and call a sell on the stock?

Let's take a real example. An example which was blogged here live back in 2005.Mieco: Part II - Ze Buy Recommendation!. Now this was an example where iCapital was owning stake in the stock while making a buy call on it at the same time!

Now, despite the clear deterioration in Mieco's earnings and immense deterioration in Mieco's balance sheet fundamentals, iCapital held firm and ignored the horrendous weakness in Mieco's business.

Let's recall what happened. On Aug 2004, Capital Dynamics made a buy call on Mieco when Mieco was trading around 2.36. Mieco last traded at 0.40! (it's current recommendation is still a HOLD! Amazing! ) (Do read that blog posting: Mieco: Part II - Ze Buy Recommendation!)

My simple question now is simple, clearly Mieco business has gone bad and if there was no vested interest, would Capital Dynamics have made a SELL recommendation on Mieco?