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Legitimate Timing Still Has A Place

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As regulators, legislators and mutual-fund executives scramble to propose solutions to the perceived problem of fund “timing,” it appears that many timers would be barely affected by the changes suggested to date.

And that may not be a bad thing – because market-timing comes in many other flavors besides the quick in-and-out trading of fund shares that hurts long-time investors and is at the center of the current investigations by New York Attorney General Eliot Spitzer and others.

Other varieties of market-timing, such as one known as tactical asset allocation, don’t involved such highly frenetic trading that can reduce profits for remaining shareholders, making these strategies far more acceptable in the fund world.

Suggestions to combat the “bad” types of market timing so far have mostly centered on imposing penalties as investors try to whip in and out of funds too quickly. One proposal from the fund industry’s Investment Company Institute, for instance, would impose a minimum 2% redemption fee in almost all instances when fund shares are sold within five days of purchase.

That approach clearly would crimp, but probably still not completely kill, rapid-fire trading strategies such as buying international funds when their share prices lag behind the prices of the portfolio securities, and then selling the fund shares as soon as one day later.

Another possible solution, which some observers believe would be more effective, is to require fund companies to change their portfolio-valuation systems to eliminate out-of-date prices.

But neither a five-day trading penalty nor pricing changes would hamstring plenty of other strategies that involve holding fund shares for months or even years at a time, but that still fall under the definition of market-timing.


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