The Sacks Equalization Model (SEM) for Open-Ended Investments

Sacks Equalization Model Inc. is the owner of a recently issued intellectual property patent. This unique patent is an algorithm, that when implemented, will save existing mutual fund shareholders an estimated total of $20 billion per year. (The estimated cost to shareholders in the mutual funds’ “late trading scandal” of 2003 is estimated at a much lesser $400 million a year.)

Mr. Seymour Sacks has uncovered a gross inequity that is inherent in all mutual funds, which is the major segment of open-ended investments. New purchasers of shares and liquidating shareholders have an unfair price advantage over existing shareholders. This inequity relates to the stock brokerage fees that are generated by the ongoing buying and selling of portfolio securities by the mutual funds.

Currently, when mutual funds price their shares, they wrongly allow new investors who are purchasing mutual fund shares, or existing shareholders who are liquidating shares, from paying their portion of the stock brokerage fees that were accumulated by the prior trading of the mutual funds’ portfolio. These new investors and liquidating shareholders are getting a “free ride” by receiving this benefit and unfairly transferring their costs to the existing shareholders, which are usually long term investors. A recently published research paper, “Mutual Fund Liquidity and Fiduciary Conflicts of Interest” by Professor Miles Livingston of the University of Florida and Professor David Rakowski of Southern Illinois University Carbondale, estimate that the above costs to existing equity mutual fund shareholders are at least $5.7 billion a year, and is considerably higher if we take the whole mutual fund universe into consideration, and still higher yet if we include all open-ended investments.

Professors Livingston and Rakowski write in their research paper that the elegance of the Sacks Equalization Model is that trading by short-term shareholders is not subsidized, nor are investors with liquidity needs punished. Each investor pays exactly the cost imposed on the fund by their trading. With the Sacks Equalization Model, the long term shareholders are not penalized by inflows or redemptions. In addition, the incentives for traders to use mutual funds as trading vehicles would be dramatically reduced. This would reduce some intangible costs to the mutual funds, such as more efficient portfolio balancing. Also the SEM model would create better cash management, as the mutual funds’ needs to maintain extra cash balances for redemptions would be reduced, also creating better portfolio decisions. This would increase portfolio performance an estimated .5% to 1% per year.

Our patented algorithm solves the above inequity that is inherent in all mutual funds and makes it a “level playing field” for all shareholders. This investment purchase and liquidation adjustment method is an investment model for open-ended investments that takes into account the net value (NAV) of the mutual fund and the accumulated stock brokerage fees. The accumulated commission fees are added to the net asset value per share prior to the purchase of shares of the mutual fund. Alternatively, the accumulated commission fees are subtracted from the net asset value per share prior to the liquidation of the shares. As accumulated brokerage transaction fees change every day because of the trading of the positions in the mutual fund, the brokerage transaction fee’s percentage change on a daily basis, too. This also solves the problem of maintaining the true asset value for existing shareholders when there are share liquidations by existing shareholders, protecting the true asset value of the remaining shareholders.

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