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Rekenthaler Report

Do You Own a Grab Bag?

Not every mutual fund is accurately priced.

(Un)Fairly Valued
When I was young and collected stamps, I occasionally would buy the $1 "grab bag." The grab bag was a mystery selection; you didn't know ahead of time what it held. Perhaps there would be a hidden treasure? Or so the advertising went. Of course there were never rarities in the grab bag, only the commonest stamps. But there was still the thrill of discovery in learning which mundane stamps were in the  packet, and it was a good starter kit for assembling the basics of a collection.

Some mutual funds are grab bags, too. Unlike with stamps, however, mutual fund grab bags can contain surprises, and almost uniformly unpleasant ones at that. I refer to the discovery that a security in a fund is worth less than its official price. (It is very rare indeed when a security is found to be worth more than its stated value.) The fund's net asset value is then abruptly marked down, and inequities are introduced. Those who bought the day before and who sold the next day end up subsidizing those who sold the day before and bought the day after.