When is it a good time to buy open-end pooled funds?
Question: I want to invest. I need to invest. But I know nothing about investing. I am told that the next best thing is to practically hire a fund manager just by buying mutual funds, unit investment trust funds or single pay variable unit-linked investments. Is there a right time to buy any of these funds?
Answer: Of course, the old adage is to buy low and sell high. But it is difficult to know if you had already bought at the lowest point since you will need the following day’s price to cement your belief that indeed the price you had bought at is the lowest. And therein lies the conundrum, as waiting for the next day’s price before you buy would have led you to miss the current price if history would eventually show that the current price is indeed the lowest price.
Instead of buying at the lowest price, an alternative tactic is to buy at your target discount to intrinsic value level. So, if based on extensive research you find out that the intrinsic value of an investment is P5 per share or unit, and you set a buying level at a discount of 20 percent to that intrinsic value, you should buy at or lower than P4 per share or unit (i.e. P5 less 20 percent).
This is easier said than done because in buying open-end pooled (i.e. nonexchange listed) funds that are invested in a portfolio of securities, you will need to examine the intrinsic value of each of the individual holdings, as if researching on the intrinsic value of one security alone was not hard enough. On the other hand, why would you need to do that in the first place when there is a fund manager who is doing the actual research, day in and day out?
If the fund manager is worth his salt, he will expertly navigate the rough seas of investing so that he ends up with a portfolio of securities that is finetuned to meet the investment objectives of the fund he is managing. He will measure returns vis-à-vis benchmarks (i.e. relative performance) or absolute return mandates. He will also calibrate the volatility of returns so that he complies with risk management rules through the many forms of diversification and using modern portfolio theory models.
In short, the best time to buy open-end pooled funds is any time. For as long as you have a medium- to long-term horizon, just periodically invest in open-end pooled funds and let the fund manager sweat it out for you.
But there is also an unknown tactic in investing in open-end pooled funds more efficiently, especially if you are investing on a periodic basis. And this has something to do with the way open-end pooled funds are priced.
Open-end pooled funds use forward pricing. This means that when you buy an open-end pooled fund before the usual cut off of 12 noon, you will know the number of shares or units you bought only by the end of the day when the fund is priced. This means that you do not get to share in the earnings of the fund on the day you bought it, even if the fund managed to earn from your own investment. Your money is asleep for one night as you only get to participate in the earnings (or losses) of the fund the next day.
The inefficiency grows if you buy an open-end pooled fund after the cutoff time, as your investment will only get booked the following morning and priced in the afternoon of that day. That means your investment is asleep for two nights. And if you invest on a Thursday afternoon, your money starts to participate in the earnings (or losses) of the fund only by the following Monday.
So, for more efficient periodic investing in open-end pooled funds, buy them on a Monday, Tuesday, Wednesday or Thursday morning.
Happy pooled fund investing! INQ
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Efren Ll. Cruz is a registered financial planner and director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach. To consult with a YAMAN Coach, email [email protected]. To learn more about personal financial planning, attend the 98th RFP Program this October 2022. To inquire, e-mail [email protected] or text 09176248110.
