Page 64 - merged.pdf

•44 The 100 Greatest Business Ideas of All Time

If a fund is not performing the providers will at some point change the team
running the fund. They do not want the fund to bring down their average and place in
the league tables for ever. They also do not want to appear for too long in the ‘Worst
performing funds’ sector of Saturday’s Financial Times. A change of management may
be all that is required to pick up performance and do better for their investors.

There is a strategy to operate on this, which is to buy annually the worst per-
forming fund in any fund manager’s stable, on the grounds that the management
change may occur and the fund will do better during the next 12 months or even be
best in stable. At that point you switch and again buy the worst performer. It has
worked in the past, from time to time of course.

There is another piece of logic behind this strategy. At present most funds are
dual priced. This means that they have a bid and offer price with a spread that
includes the initial charge the managers take for managing your money (you re-
member the basic premise). As well as this there is a cancellation price. This is the
lowest price the management group is allowed to buy back units from you according
to the official price calculation. When the bid price is at or near this, the unit is said
to be on a bid basis.

This cancellation price is a useful guide to the current popularity of individual
funds. If the cancellation price is below the bid price, the price at which the manag-
ers will buy back your units, then it is a reasonable conclusion that more units are
being bought by investors than sold. The price is known as on an offer basis. It also
means that there is scope for a widening of the offer to bid price when the fund
becomes less popular.

What you want to do is to buy when the price is on a bid basis, and sell when it
has moved to an offer basis. This is more likely to happen if you buy the worst
performing fund in a stable.

There is a problem. I said that knowing the cancellation price was useful to the
investor, so it is no surprise to find that the rules have been changed. Up until 1995
unit trusts were required to publish their cancellation prices each day. Now they are
not, but if you request the information from them they must tell you.