1MDB accounts "are audited by an international firm" (3)

From my previous posting on this matter:


The Board would like to stress that 1MDB accounts are audited by an international audit firm, Deloitte, " it said in a statement issued in capital Kuala Lumpur tonight.
It said that Deloitte signed off 1MDB’s 2013 and 2014 accounts without qualification and similarly KPMG signed off the 2010, 2011 and 2012 accounts with no qualification.


This subject has suddenly become more interesting, since the news has been published that Deloitte has resigned as an auditor.

1MDB did not give any reason why it held back the news of Deloitte's resignation, which was known for five months, and which seems to be material information.

But then again, transparency was never 1MDB's strongest point.

On top of that:

".... in a separate statement referred to the civil forfeiture complaint filed by the United States Department of Justice (DoJ) on July 20. It said the complaint contains information, which, if known at the time of the 2013 and 2014 audits of 1MDB, would have impacted the financial statements and affected the audit reports."


Despite this "small setback", 1MDB declared:


".... the Board remains confident that no wrongdoing has been committed by 1MDB and that the past audited financial statements continue to show a true and fair view of the company’s affairs at the relevant points in time ......"


That confidence seems highly misplaced given the overwhelming information available pointing to the opposite.

Hopefully one day the Board (and all other parties associated with 1MDB) will be held responsible for its deeds.

The Securities Commission has formed the AOB (Audit Oversight Board), its mission statement:

Fostering high quality independent auditing to promote confidence in the quality and reliability of audited financial statements of public-interest entities and schedule funds in Malaysia.

Over the years many critical articles have been published and dozens of red flags have been spotted regarding 1MDB. How is it possible that three of the highest regarded accounting firms in Malaysia have failed to spot the many relevant issues and have approved the accounts without even a single qualification? These same companies have also audited numerous companies listed on Bursa.

AOB should investigate all that went wrong, the reasons behind it and take appropriate measures.

1MDB's strange reaction

Assume you are running a company.

Not some small SME, but a huge one, with tens of billions of Ringgit of assets (and unfortunately, also a huge amount of debt). The company is owned by the people of Malaysia, and you really want to perform to your best ability for them, you definitely don't want to let them down.

You are doing your best, but things have not been easy, it is tough to meet the debt obligations.

And then ..... out of nowhere, a party contacts you, to tell you that they will soon send billions of Ringgit to you.

And, to your big surprise, they do this all for free, to help the people of Malaysia.

Added to that, they will even do their best to get other parties involved to send even more money (and those parties are indeed cooperating, as we speak).

How would you react, sounds too good to be true?

Basically that is what happened this week to 1MDB, I guess Christmas came early for the company and its management team.

And what was their reaction to the announcements of the above events?


1MDB notes a press conference led by the US Attorney General today relating to a civil court action filed by the government of the United States of America.

1MDB highlights that it is not a party to the civil suit, does not have any assets in the United States of America, nor has it benefited from the various transactions described in the civil suit.

Furthermore, 1MDB has not been contacted by the US Department of Justice or any other foreign agency in relation to their investigations.

As previously stated, 1MDB will fully cooperate with any foreign lawful authority, subject to international protocols governing such matters and the advice of the relevant domestic lawful authorities.


What an incredible strange and terse reaction. Four sentences, that is it, have they even bothered to read the filing?

The document is of course only an executive summary, only 136 pages long, but even then, there is so much detail, is this the best 1MDB can offer?

And are they not happy receiving back their money, do they not want to know what has happened, do they not want to see some justice being done?


"[1MDB] .... does not have any assets in the United States of America".

No, the assets are from people who allegedly stole money from 1MDB, and bought assets in the US with the proceeds. The US wants to freeze these assets and give them back to the right full owner, 1MDB.


".... nor has it benefited from the various transactions described in the civil suit."

Nowhere it is claimed that 1MDB has benefited from the transactions, in the contrary, dozens of examples are given that 1MDB allegedly has been conned from its precious money, estimated to be about RM 12,000,000,000.00.


This blog is more about capital markets, not many listed companies are mentioned in this case, but bonds are, and unfortunately not in a very positive way.

Malaysia has the ambition to become an important financial centre. The above cases (just a selection) seem to warrant scrutiny from the relevant authorities, why have they been so quiet regarding this case, surely this is not good for the Malaysian reputation?


The nice thing about these cases is that one can observe real conversations (either by phone or through email), like this one:

And to end this posting on a slightly more positive note, some Menglish is for ever added to the archives of the FBI):

Maxwells Mysterious Marketing (4)

I wrote before (here, here and here) about Maxwell's puzzling decision to spend a huge amount of money on billboards with zero impact, for instance:


The company increased its marketing spending by a factor 39 (!) compared to the preceding year, but revenue was down 38%, while gross margin went from 24% to a pathetic 6%.

It all doesn't make any sense whatsoever.

It would be good if the auditor would demand a list of the locations (GPS coordinates) of all 390 billboards and would check a few of them randomly if they exist and if they really feature Maxwell's advertisements.


It seems that the auditor has indeed tried to do that, Maxwell announced today:


.... that the Board has been presented with the Report dated 19 July 2016 by Ferrier Hodgson MH Sdn Bhd (“FHMH”).


Some snippets:


In view of the above, questions arise on the commercial and financial justification for incurring those advertisement costs of RM64.62 million (RMB92.40 million) when the MIHB Group was at the same time trying to down-size its involvement in the retailing business. (Section 4.3.2).

A search on the Six Advertising Contractors (similar to the companies searches made in the Companies Commission of Malaysia) was carried out and it was revealed that two (2) out of the Six Advertising Contractors were not in existence whilst one (1) had already ceased operations.

Numerous requests were made to the MIHB Group’s management for assistance to arrange for meetings with the said Six Advertising Contractors. MIHB Group’s management had represented to FHMH that since the last 10% of the contract sum has not been paid to the Six Advertising Contractors, the relationship between the Six Advertising Contractors and the MIHB Group has gone sour. It was unlikely that the Six Advertising Contractors would be agreeable to a meeting with FHMH.

According to the contracts with the Six Advertising Contractors, 390 billboards were to be erected in cities across the PRC for a one year period from 1 March 2015 to 29 February 2016.

2. Since FHMH's appointment on 21 December 2015, we have not been able to visit any of these 390 sites as the billboards have been dismantled in October 2015 for non-payment of the remaining 10% of the consideration.

The management’s reason for not paying the remaining 10% was that the advertising activities were not positively contributing to the sales of MXCL, notwithstanding the non-payment is a breach of MXCL's contractual obligations.

On 27 January 2016, TSS by way of emails forwarded 53 JPEG files which purportedly show images of billboards of the relevant products being advertised by city only. There is no reference to any streets or buildings numbers or exact locations of same.

5. We had further conducted examination on the JPEG files particularly with respect to the properties and details of each of the JPEG files which suggests that the JPEG files have been created under Adobe Photoshop program.


What a mess!

For those who are counting on some form of justice to be done in China for the Malaysian shareholders of Maxwell: good luck with that.

The share price since it's IPO:

SGX hiving off regulatory arm

One of the grouses against privatizing stock exchanges (like Bursa, SGX and HKEX) is the conflict of interest between the commercial and regulatory divisions.

The SGX has taken action on this matter, according to this article in the Business Times (Singapore):

SGX to hive off regulatory functions

Some snippets:


In a move welcomed by market watchers as long overdue, the Singapore Exchange (SGX) said on Monday that it is hiving off its regulatory arm from its commercial activities. A new company temporarily dubbed RegCo will be set up as an SGX subsidiary by the second half of next year. It will house SGX's current regulatory team of around 100 people. RegCo will be run by current SGX chief regulatory officer Tan Boon Gin, who reports directly to a board separate from the exchange. Central bank and regulator Monetary Authority of Singapore (MAS) will ensure SGX gives RegCo adequate resources for its duties.

Market players hailed SGX's move as a crucial one to resolve the long-running perception that the exchange was conflicted in having to regulate its clients, which include China-related S-chips and penny stocks that had been the focus of extreme speculative activity.

While some might still gripe that the regulatory unit is not totally independent of the SGX, others countered that RegCo's board, at least, will be separate and the majority of its members independent of SGX.

In a statement on Monday, MAS said the independence of the subsidiary will be an important factor for its success. It requires the chairman of RegCo as well as a majority of its directors to be independent of SGX and its subsidiaries. All directors also have to be independent of SGX-listed companies.

Although the proof is in the pudding, this proposal sounds like a step in the right direction. Bursa Malaysia should consider to follow suit.

High fees dampener for unit trust (3)

Just to show the effects of sales commission and management fees, I will use the following example:

• The fund Amanah Saham Nasional 3 Imbang, managed by PNB, a slightly conservative fund, 2 out of 3 star rating, peer ranking 19/44, size about RM 1.2 Billion, all pretty decent
• I assume 3 year holding period, starting 30 April 2013 until 30 April 2016, as shown in the fund overview
• Sales charge 5%
• Management fee 1.5% per year

Lets assume one invests RM 100 on April 30, 2013:

• First RM 5.00 is used for sales charge
• The remaining RM 95.00 grows over the three years by 9.11% to RM 103.65
• During those three years the cumulative management fee is about RM 4.45

In other words, the total return on the RM 100 is RM 13.10, this amount is divided as follows:

• RM 5.00 (38%) as sales charge
• RM 4.45 (34%) as management fee
• RM 3.65 (28%) as return for the investor

Is this a fair division, the investor getting only slightly more than one quarter of the total return in exchange for investing the money and running all the risk?

I claim it is not. A sales charge of 1-2% would be much more in line.

Let's assume 1.5% as the sales charge, the numbers would change slightly:

• First RM 1.50 is used for sales charge
• The remaining RM 98.50 grows over the three years by 9.11% to RM 107.47
• During those three years the cumulative management fee is about RM 4.63

In other words, the total return on the RM 100 is RM 13.60, this amount is divided as follows:

• RM 1.50 (11%) as sales charge
• RM 4.63 (34%) as management fee
• RM 7.47 (55%) as return for the investor

Much more fair already, and the return for the investor is more than twice the return with a 5% sales charge.

Needless to say, this is just an example, the preferred holding period is definitely longer than three years (but how many people do actually hold their investments longer than three years?). The fund is good, but a bit conservative. And there have been better periods of three years in the past (but also worse).

But still, the message is (I think) clear, high sales charges will eat too much in the returns of investors.

Hopefully one day this will change, and the maximum sales charge will be capped to a realistic number, say 2% for smaller amounts, 1% for larger amounts.

High fees dampener for unit trust (2)

Good article in The Star:

Entry fee in Malaysia’s fund management industry among highest in the world

Some snippets (emphasis mine):


The fund management industry in Malaysia has often been criticised for charging their retail clients fees that are deemed too high.

In particular, there is a fee called the entry fee, which at 5% to 6% imposed on total funds invested, is thought to be among the highest in the world.

Some industry players, long worried about the issue which in their view affects the industry’s competitiveness, is suggesting a lowering of this particular fee, said to be used to cover marketing and distributions costs of unit trusts and other investment products.

Areca Capital CEO Danny Wong Teck Meng, for instance, says that his company has always maintained that the prevalent entry fee of 5% to 6% is too high.

“UK and Australia have already banned commissions from entry fees, yet this is still the norm here in Malaysia,” Wong, who helps manage some RM700mil in client funds, tells StarBizWeek.

Entry fees are determined by the market and whatever that is collected is paid out mainly to product distributors (banks, independent financial advisers, platforms) and their agents.

Because of the current high fee structure, Wong feels that this has led to a host of other issues including, “product-pushing” practices as opposed to consultation/advisory selling.

“A lot of times, for certain fund houses, the “advisory” work that should come hand-in-hand in order to justify the high fees, is lacking,” he says.


On top of the entry fees, clients who ask fund managers to help grow their money also pay other indirect fees such as an annual management fee, trustee fees and some even pay financial planner advisory fees which can go up to an annual 2% of the market value of an investor’s portfolio.


All very true, and good that The Star pays attention to this issue, that is very important for people who want to invest in unit trusts.

But ...... all issues have been highlighted before, already in 2011, in an article I wrote about before:


High fees of 5-7% as front end commissions for unit trusts are simply outrageous, you can not expect to make much more than that over a year in the long run given the relatively low Corporate Governance standards in Malaysia, see my previous blog post:

http://cgmalaysia.blogspot.com/2011/09/bursa-long-term-returns.html

Giving away the gains of one whole year in commissions is therefore utterly ridiculous. If you own a house that you want to rent out, do you give the agent a commission equivalent to one year rental?

The authorities should come down hard on these kind of practices. Fees of 1% (for larger amounts) up to 2% (for smaller amounts) are reasonable.

As long as that has not happened, boycott the ones that charge more, and go for the online portals or the niche operators with the more reasonable fees


In other words, we are almost five years further and nothing has happened. Very disappointing.

For a look at sales practices and what commissions and expenses will do to investment returns (in the US context), please have a look at this book:

"Odds On: The Making of an Evidence-Based Investor"

Bonds: has the World gone mad?

First there was the news that the yield on the 50-year Swiss bonds has turned negative.

In plain English: you put your money away, and get 50 years later less money than you put in.

What happens in those 50 years, who knows? There might be a time of raging inflation, which means that the money at the end of the 50 years might be worth peanuts (literally).

It could also be that bond yields turn double digit, if one is forced to sell those bonds at that moment, good luck, a huge loss will be your result.


Now the news came out that Uber has issued a leveraged loan yielding only 5% interest per year. This company has never seen a profit in its existence (it is burning through billions of USD), something that is likely to continue for the foreseeable future.

Is that the new definition of "junk bonds"? Where are the times when junk bonds were yielding double digit interest rates, as they should, to compensate for the high risk of not getting back ones principle?


Central bankers who have caused the huge distortions might be euphoric about all these events. But do they really know what the future will bring, in what is probably the largest monetary experiment ever created?

The 10-year yield on the US Government bonds, the lowest ever:

Idea: Tracker Fund of Hong Kong (2800.HK)

The objective of the Tracker Fund of Hong Kong is:


"..... to provide investment results that closely correspond to the performance of the Hang Seng Index ("Index").

The Manager seeks to achieve this investment objective by directly investing all, or substantially all, of the TraHK's assets in shares in the constituent companies of Hang Seng Index in substantially the same weightings as they appear in the Index."


And that is indeed what is happening, providing results very close to the HSI.

The largest holdings of its current portfolio:

The yearly charges are very low, as detailed by David Webb:

" ..... the Tracker Fund remains the most efficient way for those who cannot pick stocks to own a piece of the HK market, costing around 0.1% p.a. compared with almost 2% on your MPF funds."


I think that the Tracker Fund (and thus the HSI) is undervalued at the moment.

One clue can be found in the share price:

In the "goldilocks" years (before the Global recession of 2008/09) the share price probably overshot it's fair value, while during the recession it went too low. May be a valuation of about HKD 20 was fair for those years.

But the current price is still in that same region, meaning that the share price has not appreciated over about eight (!) years.

Another clue can be found in the dividends (which the company pays twice a year):

The last column shows the yield at the current share price, it has been steadily rising, and one can expect a total dividend of around HKD 0.80 this year, for a yield of close to four percent. That is rather rich, I think it will come down eventually, not because the total dividend amount will come down (it will most likely continue to rise steadily), but because the share price will go up.

In other words: while waiting for the share price to rise, one can enjoy the rather rich dividend yield of about 4%.

However, as always, there are risks involved:

• The results of Hong Kong companies are tied to the economy of China, which at the moment is not doing well; I assume that is temporarily, and in a few years all is going full steam ahead, but that is an assumption
• Globally things are rather "shaky" (think: Brexit), which could give downward pressure to the share price in the near future
• There are quite a few banks in the portfolio, personally I am not too enthusiastic about that, I had rather seen more non-financial companies
• The Hong Kong Dollar is tied to the US Dollar, which has performed very well in the past; that could change in the future, even the peg could eventually be discontinued which could have a negative effect on the share price (at least in the short term)

Disclaimer: this is not a recommendation. Please do your own homework, and make your own investment decisions or ask advice from a professional advisor. I do own (at this moment) shares in the Tracker Fund.

Shift in focus of this Blog

This blog is about 4.5 years old. Some stats:

• 860,000 page views, about 15,000 per month
• 1,097 blog posts, from "copy cat" articles with hardly any new content to heavy researched articles costing hours (sometimes days) of work
• 1,127 comments (after deleting the usual ads and rubbish/insulting comments), often interesting ones

Certainly not bad at all, much better than I would ever have imagined.

But ..... a blog about Corporate Governance issues is often quite negative because of its nature.

And, may be more worrisome, the effect that this blog had on regulatory enforcement is about zero, I reckon. I am not aware of a single case where this blog actually made a noticeable difference.

That is not exactly unexpected in the Malaysian context, where enforcement is notoriously weak (and basically non-existent when VIPs and VVIPs are involved, as the 1MDB saga makes plainly clear) and given the "shoot the messenger" culture. But it is still frustrating.

Therefore, I have decided to shift focus and to start highlighting some of my investment ideas, something that I have avoided so far in this blog.

Areas of interest:

• Under-researched small caps and mid cap companies, focused, well managed, dividend paying, high ROE, no or little borrowing
• However, I will sprinkle large cap companies in between, I do see quite a few with interesting value
• "Special cases", like well managed Closed-End Funds with low management fees trading at a discount to its NAV, REITs, etc.
• Countries of interest: Hong Kong, US, Singapore, Malaysia (probably in that order) plus the rest of the world
• Sometimes it will involve a whole industry or country/region
• In general: more about (deep) value investing: articles, magazines, books and fund managers

However, I would like to "warn" the reader:

• Despite being an active share investor for more than two decades and having had good/excellent investment returns, I am not a licensed financial adviser, nor do I have any intention whatsoever to become one. In other words, there won't be "hard" buy/sell recommendations, more sharing of ideas highlighting the positive aspects but also the risks involved
• Not surprisingly, I will have a position in each company that I will write about; I will leave it to the reader if this falls under "putting my money where my mouth is" or "conflict of interest"; owning shares in the company will bias my views, I am aware of that
• I might or might not inform the reader when I sell shares in the company, or buy more
• The reader should always do their own homework and take their own decisions

Why do I do this, since I do not earn any revenue from this blog?

First of all it forces me to write my thoughts down in public, which is in itself a healthy exercise.

Secondly, I often have received good investment tips from others, also I have been rather lucky in live, so this is part of "paying back".

The danger: some of the ideas I will share might perform poorly, I am actually sure that not all will perform good. I don't know a single good fund manager who has not had his/her share of "duds", especially investing in the small and midcap area.

Besides doing their own homework I do expect readers to spread their risk by buying a basket of shares (six to ten should be ok, if spread out over different industries and/or countries).

Also, having survived the 1997/98 crisis (having invested for instance in shares like Public Finance (foreign) and watching them go down from RM 4 to below RM 1), I strongly recommend readers to use zero leverage. There is simply no need to use leverage, it just takes somewhat more time to get good results, while avoiding losing it all. Only two years later Public Finance was back to around RM 7, while having paid good dividends in the mean time (somewhat later it was merged into Public Bank, at a good price). Even a low leverage of say 25% would have bankrupted me in that crisis.

This blog will still report from time to time about CG issues, especially updates on older cases, but less so.

I hope the readers like the new focus of this blog.

Wishing all readers a joyous and blessed Hari Raya AidilFitri.