Provident Fund Switching Anomaly

There is an unknown (well......except for me and the Manager of the Emirates Provident Fund) method of purchasing equities at the closing price for the PREVIOUS DAYS CLOSING PRICE as opposed to the industry wide standard of crediting purchases at the CURRENT DAYS CLOSING PRICE. This is a "technique" I use to achieve a slight advantage in Provident Fund purchases.

As way of background, a little over 1 year ago I had completed a switch within the Provident Fund and was surprised by the price I was credited with in the process of doing the "switch". As such, I wrote to the fund manager and asked for clarification. That is when I discovered this anomaly.

The question began as follows:

From: Capt Dwayne Malone - CAPTAIN(A) Sent: 07 February 2009 12:23To: Nick Foxton - MHR - BenefitsSubject: Switch question 155551 Capt. D. Malone

Dear Mr. Foxton,

I completed a switch within my provident fund last month and I have a question as to the unit prices that were utilized to complete the transaction.

The transaction was EMR/0003104/2593 completed 0919 Dubai time on 09 Jan 2009.

The transaction in question was a switch from BlackRock/MLIM US Dollar Cash Portfolio into BlackRock/MLIM Equity Portfolio.

My understanding is that the price credited for a switch is the price for the day in which the switch was confirmed completed. In this case, the switch was confirmed as having been completed by Watson Wyatt on 09 Jan 2009 (their website states the “effective date” of the transaction as 09/01/2009 and the “unit price date” for the transaction as 09/01/2009). As such, my understanding is the unit price at which the transaction should be recorded is the unit price on 09/01/2009.

In this case, the price I was given for my transaction was for the closing unit prices on 08 Jan 2009.

Am I missing something here as I never seen an investment where I am able to get credit for a unit price the day before I placed a trade.

Please look into this if you could and let me know as something does not appear to be right.

Regards,

Dwayne Malone

In response to my email I got the following back from the Emirates Provident Fund Manager:

Dear Dwayne,

Apologies for the delay in responding I just wanted to double check my understanding of this with the fund manager first.

The pricing basis used is correct but I can totally understand why you’re confused. Basically the four BlackRock Managed funds (Managed Equity, Managed Total Return, Managed Bond and Managed USD Cash) all use what is termed a reverse price (as opposed to a conventional forward price) which means the price you trade at today is the price from yesterday. This has always been the case and is a legacy from the way the funds were set-up many years ago. All these four Managed funds were designed to be ‘fund of funds’ in other words they invest in underlying individual sub-funds. The price for each of these Managed fund is created out of a weighted average of the sub funds price according to the actual percentage mix of them. In order to create a weighted average price today the sub funds price has to be known first, so to do this BlackRock take yesterdays price for all the individual funds and then create the Managed fund price for today. This then gets fed into the administration system and represents the price you trade at today assuming your instruction goes in before today’s cut off. If it goes in after today’s cut-off the price tomorrow will be based on the weighted average of today’s sub fund prices.

· day 1 - prices calculated for the individual funds constituting the Portfolio;

· day 2 - blended price calculated for the Portfolio based on day one's individual prices;

As you quite rightly say, ordinarily most funds use a forward price basis so if you place your deal before today’s fund cut-off time you would get the next dealing dates price. This is exactly what happens on all the other MLIIF, Russell and Fidelity funds, in other words when you place an instruction you don’t know what price you will deal at. Theoretically with the Black Rock Managed funds you could get ahead of the market and work out the price before you deal.

Nowadays only the Managed Equity Fund and Total Return fund actually use sub-funds and the Bond and Cash fund just invest in one underlying fund so no longer need to operate the blended reverse price basis. However, BlackRock are reluctant to change this as their investment mandate does give them the flexibility to use a fund of fund approach and in this scenario they would need to use the blended pricing.

Hope this helps explain your query.

Regards,

Nick

As can be seen, if you are able to complete a switch between the BlackRock core funds (Managed Equity, Managed Total Return, Managed Bond and Managed USD Cash), then you can take advantage of market conditions by getting a price at YESTERDAYS CLOSE as opposed to TODAY'S CLOSE.

I have used this anomaly in the following way. When I am interested in converting my USD cash positions into Equities, I wait until I have had a look at the overnight session in the Equity Futures and the Far East markets. If they are both strongly up, there is a reasonable chance the U.S. markets will follow. As such, I place a switch from USD cash to Equities and get the price for the previous days close.

Important: You must make the switch before 10:00 am Dubai time. To be on the safe side, I know what I will do early in the morning and place my switch between 8:00 am-9:00 am.

Alternately, if I am interested in moving out of equities and into cash, I watch the overnight session. If both the Futures and the Far East are collapsing, I place a switch from Equities to USD cash and it is credited at the equities closing price for the previous days close.

Just a tidbit you might want to put into your "quiver" of investment strategies.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions.

dwaynemalone1@gmail.com