Predictable pricing errors and fair value pricing of US-based international mutual funds

Fair value pricing is a critical issue for mutual funds with international market exposure because trading in the underlying foreign securities is not synchronous with US market trading. Using a sample of Japanese open-end mutual funds that trade in the USA, this paper explores the potential for exploitation of common mutual fund pricing practices and identifies much larger pricing errors than previously reported. A simple, objective solution to the fair value pricing quandary is proposed. The solution, based on foreign exchange-traded funds and the S&P 500, provides a timely, objective pricing alternative that is less exploitable than current mutual fund pricing practices.