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Managed Funds scams not common in NZ - Securities Commission

Thursday 3rd February 2005

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Concerns were raised last year in the United States, and subsequently in Australia, about certain practices known and "market timing" and "late trading" that may be detrimental to investors.

The commission found that neither market timing nor late trading was commonly practised in New Zealand.

It says in New Zealand both historical and forward pricing methods are used by fund managers to price their funds.

There is a greater potential for market timing where historical pricing, rather than forward pricing, is used.

The commission says that most fund managers have taken steps to detect and deter market timing activities and it supports these steps.

Investment Savings and Insurance Association chief executive Vance Arkinstall says “the questionable practices of fund managers uncovered in the United States in late 2003 were serious and cast a cloud over the global industry.”

He says the commission’s review “was an important step” in removing investor doubt which may exist in New Zealand.

“We are pleased that the findings of the commission confirm our belief that the unacceptable practices in the United States have not been repeated in New Zealand.

“It will provide great comfort to New Zealand investors that this independent inquiry has been completed and provides a clear report in respect of New Zealand industry practices.”

He says the findings are consistent with a similar enquiry carried out in Australia.

“The release of the Securities Commission findings will provide added confidence for investors in the governance of managed funds (superannuation and unit trusts).”

What is are these practices:
“Market timing” is trading in units based on an out of date price. Short-term investors use market timing to make quick trades to exploit a stale fund price. A fund price is stale when the price of the units in the fund does not reflect all the available information about that fund.

“Late trading” is the buying and selling of units after the close of trading but using a price that was current when the market closed. Late trading allows certain preferred investors to trade after the cut-off time for accepting buy or sell instructions.

In New Zealand both historical and forward pricing methods are used by fund managers to price their funds.

There is a greater potential for market timing where historical pricing, rather than forward pricing, is used. This is because a forward pricing model ensures that the price of the units is not publicly known at the time buy or sell instructions are issued by investors.

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