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

The following are some basic explanations of how the Sacks Equalization Model works. We are using examples of the existing methods now in effect and the proposed SEM methods.

The Existing Method When New Investors Purchase Mutual Fund Shares

A new mutual fund is started, whereby the original investors on the first day buy 1,000,000 shares at $20.00 dollars per share, for a total amount of $20,000,000. (In these examples, offering sales charges, if any, are omitted.)

This example uses a presumption that the mutual fund manager invests the full $20,000,000 on the first day, and assuming the stock brokerage fees in assembling the portfolio total .3%. We are also assuming that the price of the portfolio assets remain exactly the same, so that the next days’ net asset value per share would change to $19.94. ($20,000,000 less the .3% of the accumulated stock transaction fees = $19,940,000, divided by the 1,000,000 shares outstanding = $19.94 per share.

In the above example, new investors have a price advantage over existing shareholders. New investors pay $19.94 per share, thus escaping the stock brokerage fees that were paid to assemble the existing portfolio, while the existing shareholders pay $20.00 per share for exactly the same portfolio. Of course, net assets and accumulated stock brokerage fees change every day, but this inequality always exists in all mutual funds, no matter what.

The SEM Method When New Investors Purchase Mutual Fund Shares

The SEM solution to the above inequity would be to charge the new investors the .3% for their portion of the accumulated stock brokerage fees. The calculation of this charge would be to add 3.009% to the new net asset value per share, thus the new shareholders would pay $20.00 per share, the same as the previous days shareholders. These extra charges would flow into the assets of the mutual fund. Then after recalculating the net asset of the mutual fund, the net asset value for a share would be the same for the new and existing shareholders, each one having paid for their appropriate portion of the portfolios stock brokerage fees. As the accumulated stock transaction fees change daily, the fee transaction percentage would also change on a daily basis.

The Existing Method When Existing Shareholder Redeem Shares

When existing shareholders redeem shares in a mutual fund, the shares are redeemed at net asset value, not taking into account the stock transaction fees that will ultimately be paid for selling the portfolio shares related to the liquidation. A mutual fund has $19,940,000 in net assets with 1,000,000 shares outstanding, or a net asset value of 19.94 per share. Redeeming shareholders would redeem their shares at $19.94 per share, leaving the remaining shareholders in the mutual fund unfairly assuming the stock transaction fees related to the redemptions.

The SEM Model When Existing Shareholders Redeem Shares

The redeeming shareholders would be charged a portion of their assumed stock transaction fees (in this case .3%). They would receive $19.94 per share, less .0598 cents per share = $19.88 per share. This .3% would flow into the assets of the mutual fund. Then after recalculating the net asset value of the mutual fund, the net asset value per share for liquidating and existing shareholders would be the same, each one paying their appropriate portion of the stock brokerage fees.

The Sacks Equalization Model is being licensed to mutual funds as well as all other open-ended investments who want:

  • The obligation of establishing a level playing field for their shareholders by computing a fair price for their shares.
  • The elimination of a major incentive for traders to use mutual funds as trading vehicles which would result in a more efficient portfolio rebalance.
  • To maintain better cash management procedures, because of the reduced cash balances that are needed to meet redemptions.
  • Increase your portfolio performance an estimated .5% to 1% per year.

Open-ended companies who obtain a license for the Sacks Equalization Model have the option of displaying this “Fair Pricing Seal” on their literature informing their current and future shareholders that they are receiving the benefit of fair pricing.

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