Portfolio Pumping in Singapore not Widespread, says CFA Institute

Portfolio pumping or the practice of manipulating stock prices higher at calendar-end periods is not as widespread in Singapore as commonly perceived. That is the finding of a report by the CFA Institute authored by its staff at its Asia-Pacific regional office in Hong Kong. But don’t confuse that practice with “window dressing” or outright pump and dump” schemes.

The detailed research behind the CFA Institute report was sparked by a landmark civil suit filed by the Monetary Authority of Singapore (MAS) against well-known fund manager Tan Chong Koay and the firm he founded, Pheim Asset Management, back in August 2009. The suit alleged that Tan had created a false or misleading appearance to the share price of United Envirotech over a three-day period from Dec 29, 2004 to Dec 31, 2004.

Tan was subsequently found guilty and paid a hefty fine for his investing misdemeanour. He was also prohibited from working as a fund manager in Singapore for two years. The prohibition order expired last November and only recently was Tan successful in his licence application to resume work as a fund manager again.

In the CFA Institute report, which used data on 189 companies listed on SGX that span 11 years from 2003 to 2013, the two authors, Tony Tan and Alan Lok, came to the conclusion that the malpractice was virtually non-existent in Singapore except for a specific segment of the market. That market segment where some elements of portfolio pumping were observed was defined by certain characteristics: they were usually mid-cap stocks in the $2 billion to $5 billion range; their free float liquidity tended to be lower than average; they were invariably poor-performing stocks that were not constituents of the MSCI Singapore Index; and, finally, they usually had a higher level of buyer-initiated trades. Even then, Lok described the existence of portfolio pumping in that category of stocks as “not statistically significant”.

“But we do recommend for regulators to always take a close look at the mid-cap and worst-performing stocks because that is where the incentive to portfolio pump exists,” he says. “We also suggest that market surveillance should increase to make it difficult and expensive for such activities to be undertaken.”

Window dressing

In their report, Tan and Lok make a firm distinction between portfolio pumping and the poorly understood concept of window dressing that is often wrongly applied as the former. While portfolio pumping pushes stock prices higher before the end of a calendar period to increase a portfolio’s value, window dressing is the act of selling poorly-performing stocks and buying better-performing ones in order to present a favourable if untrue picture of a portfolio’s returns at the end of a certain period.

Lok, director of Asia-Pacific capital markets policy at CFA Institute, also stresses that while portfolio pumping is illegal as illustrated by the case against Tan Chong Koay, the practice of window dressing is not defined as a breach of law in Singapore. “But it is unethical under the CFA standards because it can be said that you are trying to mislead others,” he explains.

Pump and dump

Meanwhile, Lok’s co-author Tan, who is head of standards and advocacy for Asia-Pacific, says the findings of the CFA report should not be confused with the ongoing investigations into the so-called “penny stock fiasco” of 2013. That case relates to shares of Asiasons Capital, Blumont and LionGold, that rose to unsustainable heights before crashing abruptly. “That was pump and dump,” Tan says. “It’s not the portfolio pumping we have been talking about.”

‘Pump and dump’ refers to the act of driving up a stock price by creating a false market that lures in other buyers, with the initiators of the ruse selling their shares for a tidy profit before an inevitable crash or correction occurs. The crash of Asiasons, Blumont and LionGold is now being investigated by the Commercial Affairs Department and the MAS.

This article first appeared in The Edge Singapore Market Report.

Thinking of investing in penny stocks? Read this before you do anything: 3 Things Your Stockbroker Doesn’t Want You to Know About Penny Stocks

How does the SGX plan to better protect the retail investor after the ‘penny stock fiasco’? Find out here: SGX: 8 Things I Learned from its AGM 2015

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