Live Prices and Stale Quantities: T+1 Accounting and Mutual Fund Mispricing

Abstract

In this paper, we examine a little known aspect of mutual fund accounting, whereby funds do not use contemporaneous fund holdings to calculate net asset values. This practice, sanctioned under SEC Rule 2a-4, uses stale portfolio holdings and gives rise to deviations between reported net asset values (NAVs) and returns and the economic values of those quantities. Using both simulations and a new sample of fund transaction data, we establish that distortions in both NAVs and returns are fairly common, and we discuss the implications of this observation for fund practice and regulation.

Keywords: Mutual Funds, Net Asset Value, Daily Returns, Financial Institutions, Regulation, NAV

JEL Classification: G18, G23, M42