Rich in Orchard Beach, Md., likes to check in on his investment portfolio most nights after dinner. It’s a quick look-see to make sure everything is fine. It was not any of those things when he checked in last Monday.
His shares of Vanguard Wellesley were down 56% for the day, which would be catastrophic for any fund, but completely unheard of for a balanced offering that puts roughly 40% of its money into large-cap value stocks and 60% into investment-grade bonds.
“I saw it and was, ‘Holy Moly,’ ” said Rich, who listens to my “Money Life with Chuck Jaffe” (moneylifeshow.com) and regularly corresponds with me. “And then I was like, ‘This is impossible, this can’t be real. Something has to be mispriced.’ ... So I figured I would wait and see.”
The problem for Rich was Vanguard Wellesley, but investors in Vanguard Target 2025 — a conservative life-cycle fund — appeared to be off more than 20%. Vanguard Wellington was off by about one-third.
Those moves were abnormal on a day when the Dow Jones Industrial Average was off by about 400 points.
Vanguard wasn’t talking, nor was it alone; it’s virtually impossible to know who else was affected by a temporary, fleeting problem.
Vanguard had its issues figured out and corrected by 8:45 p.m. It issued a statement, noting that the issue was caused by “delays experienced by the NYSE which impacted numerous pricing vendors that provide security pricing data for firms across the financial industry. As a result ... the Vanguard fund prices reflected on Vanguard.com between 6:10 and 8:45 p.m. EDT on August 12, 2019 were not the fund final prices, but rather incomplete preliminary prices.”
(The pricing issues also affected the Nasdaq market.)
Most important, the company noted that there was “no material impact to the funds.”
Pricing glitches happen all the time, and generally go unnoticed.
There are different types of mispricings, and investors want to pay attention anytime a fund’s price swings more than expected.
While there is a lot to be said for not watching investments minute by minute — anyone who checks prices weekly or monthly or in the morning never would have had Rich’s “Holy Moly” moment — there is something to be said for knowing your investments well enough to be awake if you see big, sudden, unexpected movement.
The first mispricing event that I recall making real headlines occurred in 1994, coincidentally at the very time when I had to sell my stake in Fidelity Magellan — my first stock fund — to comply with an employment agreement imposed by my new employer, The Boston Globe.
Having sold my shares on a Thursday, I looked to see the closing price in Friday morning’s paper, unaware that Fidelity had used stale prices, because it hadn’t been able to calculate the official prices on time the day before.
That was the first time investors learned that the price you will be paid for your shares is the correct one, not the one that shows up in the paper or even the one on a trading confirmation if, indeed, the confirmation is based on erroneous data.
As one of the investors actually affected by the mispricing, I was a rarity. I know that my trade was priced differently than shown in the paper the morning after my transaction, but the whole difference amounted to a few bucks; I believe the adjustment actually worked in my favor.
Funds also have been mispriced in the past not because of a glitch but because they have troubles valuing illiquid securities and keep them on the books at a static price until some random transaction forces them to reconsider the real value. The Van Wagoner Funds imploded in a case like this, where private securities were valued at their purchase prices even as troubles were eroding their true worth.
Catastrophic mispricings are rare, but anyone considering some type of exotic fund or ETF — something with illiquid or unconventional holdings — should know it’s possible and watch for strange, unexplained volatility.
Smaller mispricings often occur and are fixed with few people even knowing the difference.
In September 2013, for example, Wells Fargo reset the value of Wells Fargo Advantage International Value and Wells Fargo Advantage Diversified International; shares of the funds fell by 5% and 2% in a single day when the fix was made. The company disclosed the pricing change, but never said what went wrong.
And many investors believe a mispricing has occurred when a fund pays out a big capital-gains payout, even though that is simply a reshuffling of the fund’s net asset value, with the shareholder getting the distribution while the fund’s share price falls by that same amount.
That kind of pricing adjustment is business as usual for funds.
Glitches that cause real “Holy Moly” moments are few and far between.
If a fund suffers a loss that is larger or more sudden than expected — or out-of-character for the type of fund you own — contact the fund firm for an explanation. (You may want to do it if a fund goes up beyond your expectations, too, even though no one complains about upside volatility.)
If you own ETFs instead of funds, make sure mispricings did not trigger limit orders and get you out of a fund based on a false signal. In those rare cases, there may be a chance to have trades rescinded, but you will have to act quickly.
“I figured if something had caused a fund that is 60% bonds to lose more than half of its value in a day, I would have heard about it,” Rich said, “but it was still scary to see my account showing a loss that big, even if it wasn’t real. … I felt better when it was fixed and everything was normal again.”