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Strategies & Market Trends : Gorilla and King Portfolio candidates - Moderated -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (114)	10/28/2003 11:50:07 AM
From: Jay	Read Replies (1) \| Respond to of 2955

As you said, I'd not be inclined to invest in those funds. What I do not completely understand is why they discourage investors/traders from legitimately trading these funds. How does it affect a funds performance with traders moving between funds in a short time frame? Jay

To: Mike Buckley who wrote (114)	10/28/2003 1:02:45 PM
From: Mathemagician	Read Replies (1) \| Respond to of 2955

The Putnam thing is a bit different from what I'm talking about. Those guys were allegedly using proprietary information and violating the fund's rules. Further, Putnam is alleged to have known about it and done nothing to stop it. If so, they should both be punished. By itself, however, timing a mutual fund is nothing more than buying and selling shares in the fund more frequently than "usual". What is being referred to as "fund timing" in the media is the arbitrage opportunity in international funds created by the fact that orders can be placed as of 4pm ET, despite the fact that the prices used to set the NAV are the closing price on the exchanges where those funds' holdings are traded, which are fixed much earlier. Here's how it works. A trader can estimate that day's NAV (i.e. his purchase price) before 4pm ET using only publicly available information (e.g. fund portfolio composition and the closing prices on the international exchanges). The trader then watches the US markets (often including the ADR of the very same securities held by the mutual fund) to see how they behave going into the US close. To oversimplify a bit, if the fund's holdings close higher in the US markets (and/or ADRs) than they did in the international markets then there is a better-than-even chance that they will trade higher when the international markets reopen just a few hours later, so the trader places an order to buy the fund. This gives the trader a very good chance of buying the fund at a price that is below its "true value". The risk to the trader is that the move will not follow through, and this risk can often be hedged. The mutual fund industry has created "fair value pricing" to combat this particular (well-known and commonly practiced) type of arbitrage. A fund that uses fair value pricing sets its NAV based on an estimate of the value of the fund's holdings as of the US close, rather than the close of the international markets. There are many other strategies for timing mutual funds (after all, they are marketable securities and the NAV is just a price series). One of them was used so successfully by its inventor that he ended up being featured in one of Jack Schwager's Market Wizards books. <font face=wingdings>e</font>