A number of mutual fund companies, including Putnam, Janus, Bank of America and Invesco are under investigation for their alleged involvement in activities - such as late trading and market timing - that benefited short-term traders at the expense of long-term investors.
Although the scandal has rocked the US mutual fund industry, European funds are not immune to market-timing and, earlier this year, Schroders was forced to implement anti-arbitrage mechanisms to protect its ISF range which is domiciled in Luxembourg, according to Robert Higginbotham, Schroder"s head of global marketing.
"What highlighted the issue to us, was a couple of large deals that could have cost the fund 0.5% in one day," he said.
In order to protect shareholders, Schroders has moved its valuation point from 1pm to 3pm. "Market developments that could have affected the valuation of the fund between the previous valuation point of 1pm and the dealing cut off point at 3pm, meant that clients would be able to deal with the knowledge of which way the markets had moved, after the fund had been valued," Higginbotham explained.
It has also introduced fair value pricing which combines an historic closing price with an estimation of market movements based on a surrogate index to calculate a more accurate price for the fund. This means the price clients trade at more accurately reflects the current environment. Without this, in the case of US traded securities, the most recent closing price could have been 17 hours old.
"In volatile markets we can now ensure that on a daily basis all deals are placed at a fair price," Higginbotham added.
Last month, International Investment revealed US hedge funds were also seeking to take advantage of UK mutual funds once-a-day pricing structure, with Standard Life and Threadneedle Investments, both being approached by managers wanting to use arbitrage strategies on international funds. However, in each case proposals were turned down.
Meanwhile in the US, Lawrence Lasser, CEO at Putnam Investments, has left the company in the wake of allegations concerning market timing by the US Securities and Exchange Commission.
In response to the allegations, Putnam Investment"s chairman, AJC Smith said in a letter to investors: "Putnam has had procedures in place to identify and control market timing. These systems were not perfect, but they did identify, and enable us to stop, the vast majority of market timers."
Commenting on the scandal, Attorney-General Eliot Spitzer said: "The full extent of this is not yet known. But one thing is clear, the mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system."
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