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CHURNING THE POT OF MONEY
TOO OFTEN
IS A HUMAN GREED &
paap
(SIN)
aARth puruSHaaARth
&
DHARm puruSHaaARth
CAN GUIDE TO CHURN THE POT
AS PER DHARm.....
PVAF continues to share the knowledge of mutual funds trading from a Globe
and Mail serial on mutual funds trading practices so that YOU can protect and
prosper with this knowledge and the knowledge from
veD of objectives of life called
puruSHaaARth in sNskRUt language
and in veD which is
SCIENCES OF CREATION AND LIFE......the
knowledge contain in veD is an life
operation manual for living human life with purpose, goals and objectives based
on the rules, regulations and laws of DHARm....DHARm
is the operating system in which the entire creation including humans have to
take birth, grow, work to sustain and continue the life travels from one life to
another in sNsaar meaning cycles of life and death....... ......
Rapid trading in mutual funds is highly profitable for professional traders.
And while it isn't illegal, fund managers have a fiduciary duty to investors to
ensure that the fund is run with their best interests at heart. Rapid trading is
clearly not in the best interests of long-term investors because it reduces a
fund's returns......
Please click on the next line to read the 2nd of the serial in Canadian
Globe and Mail on mutual fund practices of
your traders or you can read the article on the Globe and Mail web site by
clicking on the preceding red hilite.....
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How we probed the churn
patterns
By KAREN HOWLETT
Canadian
Globe and Mail: Monday, June 21, 2004 - Page B6
Rapid trading in mutual funds is highly profitable for professional traders.
And while it isn't illegal, fund managers have a fiduciary duty to investors to
ensure that the fund is run with their best interests at heart. Rapid trading is
clearly not in the best interests of long-term investors because it reduces a
fund's returns.
The practice -- where traders such as hedge funds attempt to exploit price
discrepancies in overseas funds where prices can be hours out of date because of
time-zone differences -- has been prevalent in North America. U.S. regulators
launched a crackdown in 2003. But what about Canada?
Report on Business examined the activity in international equity funds managed
by Canadian mutual fund companies, using data available for 2000, 2001, 2002 and
2003. We excluded startup funds and funds for which there were no data for a
full year.
The monthly churn rate for each fund -- a measure of all the money flowing in
and out of it -- was calculated by adding four numbers: gross sales,
redemptions, transfers in and transfers out. Transfers consist of money that
moves from one fund to another within the same company.
An annual churn rate was then calculated by dividing each fund's total money
flows for the year by its average assets.
These figures were calculated for about 500 funds in each of 2003, 2002 and
2001, and about 450 funds in 2000 -- a year in which there were fewer
international funds.
We then examined every fund with a churn rate of 100 per cent or more. A rate of
100 per cent means cash equal to the dollar value of average assets flowed in
and out of the fund.
Eric Zitzewitz, an assistant professor of economics at Stanford University's
business school, whose research has been cited by U.S. investigators, says he
would start to question whether market timing is going on in any fund with a
churn rate greater than 100 per cent.
Report on Business determined that the main mechanism for rapid trading was
transfers within the same fund family. We looked for funds with roughly similar
and erratic monthly churn patterns.
A typical example is the CI Global fund, which had a churn rate of 554 per cent
and average assets of $1.1-billion in 2003. That year, $2.85-billion was
transferred in from other CI funds, and $2.87-billion was transferred out. By
contrast, sales were only $117.2-million, while redemptions totalled
$148.8-million. The monthly churn rate ranged from 34 per cent to 120 per cent
between January and August.
In some instances for 2003, funds with a churn rate of slightly less than 100
per cent are included in the list because of their cash flow patterns during the
first nine months -- market timing activity came to a virtual halt last
September when New York Attorney-General Eliot Spitzer cracked down on the
practice.
Any fund for which a churn rate exceeding 100 per cent was just the result of a
major inflow or outflow of cash was eliminated from the list, because there was
no pattern of similar cash flows in either direction.
The list also excludes funds exceeding the 100-per-cent threshold that had large
transfers in and out in only one month. However, churn rates in these funds were
included in the aggregate calculations.
And how does this compare with a benchmark? We calculated the activity in the
international funds managed by TD Asset Management Inc. and Fidelity Investments
Canada Ltd. Both companies, which rank among the 10 largest in Canada, have had
policies and procedures in place to keep the market timers at bay. The benchmark
churn rate indicates a normal level of activity.
The aggregate annual profits for the market timers were calculated by
attributing all churn in excess of the benchmark standard to rapid in-and-out
trading. And finally, we calculated the impact on the funds' assets by applying
Mr. Zitzewitz's estimate of 60 to 70 basis points in profit pocketed by the
market timers for every round trip. (A basis point is 1/100th of a percentage
point.)
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