Why start a new mutual fund at $2/share?

mnzdedwards

I'm perplexed by the starting price of the new Grandeur Peak mutual funds. Perhaps they are just doing what they learned at Wasatch. But why $2? What possible advantage is there to such a low starting price besides the illusion of owning more than you really have?

In my view, starting at such a low offering price doesn't offer enough precision or fidelity to the fund's day to day movements. There must be a 0.5% increase (or decrease) for the fund's NAV to change. For a fund that is priced at $10, only a 0.1% change is needed to affect the NAV. Starting at $100 requires only a 0.01% change to affect the NAV.

So what's the big deal? Well, there's a certain amount of round-off error that occurs each day in the fund's NAV reporting - and you might get stuck on the wrong end when you purchase or sell shares.

For example: I want to invest $10,000 in GPIOX. The closing price when I bought was $2.01. I thus purchased 4975.124 shares. But in reality, the fund's NAV was $2.005 and was rounded up to $2.01. In that case, I should have purchased $10,000/$2.005 = 4987.531. The difference in the number of shares (12.407) at $2.01 NAV reflects a $24.94 shortchange.

Now perhaps, Grandeur Peak uses 3 decimal places (say $2.005) when figuring number of shares bought or sold. I don't know? Would David know? This would make my argument moot and I can go back to resting peacefully.

Mike_E

P.S. I'm still waiting for GPIOX to be offered at Vanguard Brokerage Services so that I can swap my Vanguard Small Cap International Index Fund (VFSVX) for it.

[Deleted User]

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randynevin

Most new mutual funds start out with a nice round number for NAV, $10 being a very common one. I wouldn't worry too much about being cheated because of round-off error; it's very likely they figured your number of shares to the third decimal point based on the NAV to the third decimal point (tenth of a cent). To put your mind at ease, you should call them and ask.

mnzdedwards

I apologize for not being clear. I assumed a hypothetical trade and its outcome based on rounding NAV to the nearest cent. I haven't purchased any shares yet, but I intend to when the funds become available at VBS. Sorry for the confusion.

Mike_E

00BY

I agree that it seems odd to start at $2 a share. That is more short term bond fund territory.

David_Snowball

I'll mention the fuller explanation in the November column, but here's the painfully simple answer: "that's what we always did at Wasatch."

andrei

Maybe Wasatch people think that it simplifes reporting? I found that quite often the prices of Wasatch funds do not move at all, and then few days later they suddenly jump. Here is the reason: Suppose the fund is up 0.1%, with the price $10 per share. The new price is $10.01, you must report it. Now suppose the price is $2. The new price is $2.002. You continue reporting the previous day price $2.00. Thus you report the change in price only when it becomes greater than 0.5%.

David_Snowball

The managers agree that an effect of the low NAV is that small changes, up or down, don't appear and that larger changes, when a series of small changes cross the 0.5% threshold, might be more common.

That said, the original rationale was symbolic: Wasatch had micro-cap funds with unusually low thresholds for closing, and they saw the tiny NAV as a reminder of that difference.

David