‘Fair-Value’ Pricing Use Backed by SEC

Mutual-fund groups using special methods to price their Asian shares after the October market plunge better protected investors from speculators than did funds using conventional pricing, a Securities and Exchange Commission review found Thursday.

The findings appear to vindicate Fidelity Investments and other fund groups that used much-criticized “fair-value” pricing after the Dow Jones industrial average fell 7.2%, or 554 points, on Oct. 27.

At issue are the SEC’s fair-value procedures that allow fund groups to consider likely overnight market developments in pricing shares at the end of a day of unusual market turmoil.

SEC investment-management director Barry Barbash said Thursday that fund groups that used “fair-value” pricing on Oct. 28 and 29 better protected Asian-fund shareholders from loss of value, or “dilution.”

“Funds using fair-value pricing with Asian funds experienced less dilution than those using market values,” Barbash told a conference in Washington of the Investment Company Institute, a mutual-fund trade group. “A fairly large number of investors tried to speculate.”

Fund groups typically price their shares based on the closing prices in the applicable exchange that day. The closing prices for each stock in the portfolio make up a composite that reflects the fund’s net asset value.

With fair-value pricing, which is used during periods of extreme market volatility, fund groups at the end of the day project the next morning’s value of the stocks that make up the portfolio. They take into account overnight developments on international markets.

Fidelity said it uses the fair-value method to protect investors from speculators who might try to exploit price spreads between the fund value at the end of one day and its value once the markets open the next.

Barbash said the SEC would review its procedures to see if any modifications should be made.

On Oct. 28, Boston-based Fidelity reported that its Hong Kong and China Fund rose 0.2%, the same day Hong Kong stocks plunged and similar funds fell more than 10%. Fidelity based its fund gain on the projection that Hong Kong’s stock market would open much higher on Oct. 29, following gains in the U.S. market the previous day.

“We’re pleased the SEC examination found that fair-value pricing protected fund shareholders from dilution during recent market volatility,” said Fidelity spokesman Scott Beyerl.

A critic of Fidelity’s fair-value pricing said, however, that the method unfairly targets new investors.

“If you accept money from a new shareholder, you have to treat him just as fairly as someone who’s owned the fund for five years,” said Eric Kobren, president of Insight Management, a investment-advisory firm that tracks Fidelity.