Soaring NAV Numbers Won't Enrich ProFund Holders

The unexpected reverse share split didn't actually change the value of anyone's account.
Author:
Publish date:

How did the ProFunds UltraBull fund jump over $60 in one day? This is a mutual fund! How did the firm's UltraOTC fund jump over $100 the same day? Was there some hanky-panky over the weekend? -- Christopher Barr

Christopher,

On Wednesday, many investors spied these anomalous jumps in the net asset values of

ProFunds

mutual funds. But fund shareholders shouldn't think they now have the extra bucks for big-ticket purchases.

Shareholders of the UltraOTC fund, for example, saw a 425% jump in the fund's NAV. One reader wrote to say, "I called my dad that morning and thought he had hit the big one."

The dramatic increases were the result of a 1-for-5 reverse share split effective Jan. 15. Shareholder accounts will now show one-fifth the number of shares, although account values won't change.

The timing -- at least for

TSC

readers -- couldn't have been better. I covered this topic in

Wednesday's Fund Forum. A fund company will sometimes split the shares of a fund to lower its NAV, making the price more palatable to investors. A firm can also conduct a reverse share split to raise a fund's NAV.

Louis Mayberg, president of

ProFund Advisors

, says that size was indeed an issue. The funds' NAVs were small enough that rounding their prices could result in NAVs that wouldn't accurately reflect the movement in a corresponding index, particularly on days in which the market makes small moves. With the reverse split, the higher NAVs of these funds will more precisely track the performance of the indices.

For example, the NAV on the

UltraShort OTC

fund had fallen below $3. Such a low NAV can cause shareholders an additional problem: They can't buy such a low-priced fund on margin at some brokerage firms. At

Waterhouse Securities

, for example, securities, including mutual funds, priced below 4 1/8 cannot be bought on margin, says Peter Mangan, executive vice president of institutional services. With the reverse split, the UltraShort OTC fund's NAV is now comfortably resting above $13.

Mayberg says the firm points out the risks of using margin in ProFunds' Ultra funds, which are leveraged funds. That is, they create additional exposure to the market. For example, the UltraOTC fund aims to double the performance of the

Nasdaq 100

.

The move also boosted the NAVs of the

Bear

and

UltraBear

funds, whose prices were in the $6 to $8 range before the split.

But the UltraOTC fund, one of 1998's top performers, now has a NAV north of $145. Why boost the price of this fund as well? Mayberg says the firm thought it would be less confusing to execute the same reverse split for all the funds (except for the firm's money market fund).

But the maneuver

did

cause a raft of confusion. Even though the reverse split did not economically impact shareholders' accounts, I received many emails from readers on the subject. Investors were also posting messages to the

Mutual Funds Interactive

boards.

Mayberg says the firm forewarned shareholders of the reverse split in their Dec. 31 statements; however, the firm's

Web site hadn't posted an explanation of the event by midday Wednesday. When I spoke to Mayberg yesterday, he said the firm had received about 100 emails, while on an average day it receives about 20.

Perhaps if there is a next time, everyone will be better prepared.

Send your questions and comments to

fundforum@thestreet.com, and remember to include your full name.

TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.