| Fund Democracy |
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Articles by Fund Democracy: Archives International Funds Still Sitting Ducks for Arbs, TheStreet.com (July 1, 2000). Abstract: My June 10 article on arbitrage pricing took foreign funds to task for hanging out the "Arbs Welcome" sign. These funds use stale prices to value their portfolios, thereby allowing arbitrageurs to make easy profits (at other shareholders' expense) by buying shares they know will rise with U.S. markets the next day. I showed that shareholders in a dozen of these funds could have lost up to 2.5% of their assets overnight during a volatile two-day period in October 1997. Since then, some of these funds have removed the Arbs Welcome sign by improving portfolio valuation procedures, restricting frequent trading in fund shares and imposing redemption fees. But anecdotal and empirical evidence suggests that some of these efforts are half-hearted or ineffective, and that the only solution to this problem may be regulatory action. While some funds claim to fair value their portfolios when closing prices on foreign exchanges are stale, the evidence suggests that these policies may be nothing more than cardboard sheriffs. Even worse, some funds still have not reserved the right to fair value, and some of those have no sales charges or redemption fees to deter arbitrageurs, thereby leaving their shareholders defenseless. Surprisingly, the SEC’s position continues to be that a fund may -- but is not required to -- fair value portfolio securities when events that materially affect the value of the securities occur after the closing of the foreign exchange on which they trade. Last December, the Commission issued its first guidance on fund pricing in 30 years, but failed to prohibit the use of stale prices. Let’s hope that it doesn’t wait another 30 years to fix the problem. If you would rather the SEC staff act than wait, then let the staff know! (View the full text of this article, free of charge.) |