Question: How are Mutual Funds Valued?
Tracy Monaghan
> All the holdings are totaled up - that is all cash, stocks, bonds etc.
> This is called the NAV, or Net Asset Value.
...when divided by the number of shares outstanding, otherwise it's
called Total Assets.
Tracy <mona...@cac.washington.edu>
Information Systems
University of Washington
4545 15th Ave NE
Seattle, WA 98105-4844
Gary Davis
during a discussion the other day, that I don't know the answer. How is the
day-to-day value of a mutual fund derived? Is it simply based on what is offered
for it, like a stock? Or is it something arrived at by formula, based on the
day-to-day value of the stocks it holds? Or something else?
--
*********************************************
Leadership is nature's way of removing morons
from the productive flow.
----Dilbert
*********************************************
Gary Strahan
funds? Specifically, should they be considered a long-term
investment of several years? or, do they work better as
a short-term, market-timing (i.e., fadish) -type play?
Thanks in advance!
Gary
WLauzon
Gary Davis
<Pine.ULT.3.91a.95062...@red1.cac.washington.edu>,
mona...@cac.washington.edu says...
>> This is called the NAV, or Net Asset Value.
>...when divided by the number of shares outstanding, otherwise it's
>called Total Assets.
So the value of a MF is total assets divided by number of shares. So, does the
total number of shares have to remain constant? If not, how does that work? In
other words, if you increased the number of shares, you would lower the value of
one share. What happens when there are more buyers than sellers or vice
versa? How do they keep the number of shares constant? Or do they?
WLauzon
called Total Assets.
Minor detail. Only off by a few million bucks.
Tracy Monaghan
> In article
> <Pine.ULT.3.91a.95062...@red1.cac.washington.edu>,
> mona...@cac.washington.edu says...
>
> >> This is called the NAV, or Net Asset Value.
> >...when divided by the number of shares outstanding, otherwise it's
> >called Total Assets.
>
> So the value of a MF is total assets divided by number of shares.
> So, does the total number of shares have to remain constant? If not,
> how does that work? In other words, if you increased the number of
> shares, you would lower the value of one share. What happens when
> there are more buyers than sellers or vice versa? How do they keep the
> number of shares constant? Or do they?
>
For closed-end funds, the number of shares outstanding remains fixed, the
shares are traded in the marketplace like stock, and the price reflects a
premium or discount to its NAV. If there are more sellers than buyers, I
would expect its price, but not its NAV, to decrease.
For open-end mutual funds, the number of shares outstanding increase or
decrease constantly as people buy or sell shares. You buy from and sell to
the fund company through its transfer agent. The fund's "price" is its
NAV (plus any load if you're so foolish to buy a loaded fund, but I
digress). Open-ended mutual funds keep a portion of their assets in
short-term fixed income investments or money market accounts ("cash") for
redemptions (sales from the investor's point of view). Depending on
how "hot" a fund is, it's cash may be 15% or more of total assets. A
large percentage of cash can be a drag on performance, as shown by PBHG
Growth during the first quarter of this year.
That's more of less how I think it works.
Philip I. Levy
> >> This is called the NAV, or Net Asset Value.
> >...when divided by the number of shares outstanding, otherwise it's
> >called Total Assets.
>
> So the value of a MF is total assets divided by number of shares. So, does the
> total number of shares have to remain constant? If not, how does that work? In
> other words, if you increased the number of shares, you would lower the value of
> one share. What happens when there are more buyers than sellers or vice
> versa? How do they keep the number of shares constant? Or do they?
>
You need to draw a distinction between closed-end and open-end
mutual funds. Closed end funds have a fixed number of shares available
and they trade like stocks. A share in a closed-end fund can sell at a
premium (price greater than Net Asset Value) or at a discount (price less
than Net Asset Value).
An open-end fund has shares that sell for the NAV (give or take
any "load"). How can the number of shares change without diluting
existing shareholders' holdings? Because the money used to purchase the
new shares goes into the fund's total assets.
A simple example. Suppose an open-end fund has 100 shares
outstanding and the NAV is $1 (so total assets are $100). Now you come
along and buy 100 shares from the fund. Total assets are $200 and the
number of shares outstanding is 200, so NAV is still $1.
An implication of this is that if a large number of shareholders
wish to exit an open-end fund at the same time, the fund manager will be
forced to sell off assets to get them their money, perhaps at an
inopportune time (if only a small number of shareholders wished to exit,
they could be paid off out of cash reserves).
A closed-end fund has no such problems. If a lot of people want
to exit at once, the price will fall and the fund will sell at a discount
(or a smaller premium). This protects the manager from concerns about
inflows and outflows of funds. It may frustrate the shareholder however
(who may have ownership rights to $100 worth of assets but may have to
take $80 for her shares if the fund is selling at a 20% discount).
Phil Levy
Julianne Gilmore
>From: str...@cgl.ucsf.edu (Gary Strahan)
>Subject: closed-end funds
>Date: 27 Jun 1995 01:29:26 GMT
Specifically, should they be considered a long-term
>investment of several years? or, do they work better as
>a short-term, market-timing (i.e., fadish) -type play?
Closed end funds (CEFs) are more complicated than mutual funds. They offer
rewards to those who study them, but can certainly frustrate a casual
investor. The premium/discount relationship is ever present and can quite
easily hurt an investor who buys or sells at the wrong time even though the
underlying investment performs satisfactorily. If one is willing to commit
the effort to analyze them they do offer enhanced returns. I am planning to
post a more complete comparison of various investment media which you might
find helpful.
Also, Sam Raja at URL=http://www.icefi.com/ puts out a fine service that while
rather complicated, provides some good info for beginning investors.
Cheers,
Gary Hall, the certified better half of J Gilmore who has the Internet account
Tracy Monaghan
>
> I think another question that is often overlooked is how does the fund price
> infrequently traded securities and securitoes with bug bid/ask spreads.
> This is particulary important for corporate/muni bond funds and emerging
> market funds.
> Is NAV really liquidation value, is it value at ask, or is it
> bid value minus transactions costs. I beleive many funds
> contract out pricing of illiquid securities to companies
> that estimate current price based on (1) bid/ask, (2) last traded
> price, and (3) performance of similar securites since the last trade
> Is this correct or incorrect?
According to PBHG Growth's latest annual report (or was it the
prospectus?), they use last traded price for thinly traded or illiquid
securities.
Sam Raja
>: What are the opinions of the people here on closed-end
>: funds? Specifically, should they be considered a long-term
>: investment of several years? or, do they work better as
>: a short-term, market-timing (i.e., fadish) -type play?
>
>
>: Gary
It is mostly a matter of personal preference, but both strategies work well
with closed-end funds. If you are a long-term investor, pick funds that are
selling at deep discounts, have outperformed their peers, and the markets in
which they invest have strong fundamentals. If your selected markets go up
you profit from the market rise and shift in sentiment.
For example, if you think
a) health care has good prospects consider Global Health Sciences fund
(20% discount, strong performance relative to other closed-end health funds)
b) telecommunications consider New Age Media fund
(20% discount, strong recent performance)
c) European countries--- consider the Germany funds (18-25% discounts);
Spanish funds (18-23% discounts)
d) emerging markets---consider the Emerging markets infrastructure fund (EMG)
(20% discount) or the Emerging Markets Opportunities Trust fund (around 18%
discount)
If you are a short-term trader, then you pick closed-end funds that are
selling temporarily below their normal discounts due to depressed markets or
unfavorable news, and sell when the discount goes to normal. There are many
strategies here but pick funds that have a good "bounce-back" possibility,
many older funds exhibit this (Templeton Emerging Markets fund, the Asia
Pacific fund, etc.). Again, whether you make money or not depends upon your
ability to select funds and screen news-items; the nice thing though is that
the
discount/premiums usually give you good clues.
As an example consider the Barings bank collapse. The Asia Pacific fund (APB)
is run by Barings Investment, and the bank collapse led to frenzied selling
of APB shares (reaching a low of $12.125 around early March). Now APB usually
sells for a premium of 10% and in good times around 35-40% premiums are
not uncommon. Besides, the Barings collapse has nothing to do with the
money in the Asia Pacific fund which cannot be touched by creditors of Barings.
If you bought it then and sold it a few weeks ago when the Asian markets
had a spurt and the Asian country funds swung to large premiums (APB went
up to around 25% premium), you would have done very nicely. The high was
$18, the low was $12.125, the holding period roughly 2 1/2 months.
Of course, not every trade will work so well but the nice thing about
closed-end funds is that investors overreact, often wildly, providing
opportunities (as a recent example, look at what happened to the Japanese
funds yesterday because of the auto-trade settlement).
--
Sam Raja (sam...@icefi.com)
The Internet Closed-End Fund Investor (http://www.icefi.com/)
Web server for closed-end equity funds.
Hong Lu
: What are the opinions of the people here on closed-end
: funds? Specifically, should they be considered a long-term
: investment of several years? or, do they work better as
: a short-term, market-timing (i.e., fadish) -type play?
: Thanks in advance!
: Gary
I believe closed-end fund is a safer bet than open-end because the
manager can avoid panic sell in extreme situation.
Mitchell Sutter
Philip I. Levy <le...@minerva.cis.yale.edu> wrote:
>On 28 Jun 1995, Gary Davis wrote:
>
I think another question that is often overlooked is how does the fund price
infrequently traded securities and securitoes with bug bid/ask spreads.
This is particulary important for corporate/muni bond funds and emerging
market funds.
Is NAV really liquidation value, is it value at ask, or is it
bid value minus transactions costs. I beleive many funds
contract out pricing of illiquid securities to companies
that estimate current price based on (1) bid/ask, (2) last traded
price, and (3) performance of similar securites since the last trade
Is this correct or incorrect?
Mitch
Obi Thomas
> So the value of a MF is total assets divided by number of shares. So, does the
> total number of shares have to remain constant? If not, how does that work? In
> other words, if you increased the number of shares, you would lower the value of
> one share.
No, remember that shares are bought. The purchase price increases the
asset value of the fund, so everything stays the same.
Gary Strahan
is that they seem to be more subject to a fadish popularity
than open funds. Hence, I wondered if one could really ever use
the buy-and-hold strategy with them.
Thanks for the replies so far!
Any additional thoughts from people?
Thanks,
Gary
Patrick
>Thanks,
>Gary
Gary,
I asked Catherine Gillis, Morningstar's Closed End specialist, that
very same question about a month ago. Her response was buy-and-hold;
the transaction costs are a key consideration.
Basically, Closed Ends are an excellent way for the individual
investor to exploit the inefficiencies in the market, have the
services of some of the top money mangers
(Templeton,Royce,Adams,Gabelli,etc) and increased leverage in overall
dividend yields via the discount.
FWIW- there's an old Wall Street saying that said, "Traders drive
Chevy's Investors drive Cadillacs."
---
Patrick 7657...@compuserve.com
======================================================
The Government is forcing me to drive on the righthand
side of the road! Is this legal?