Pax Admits Market Timing Problem

February 1, 2005 ( - A prominent socially responsible investing (SRI) mutual fund family recently acknowledged that one of its funds was hit by market timers.

Pax World funds Chairman Laurence Shadek and President Thomas Grant said an internal investigation in response to Securities and Exchange Commission (SEC) inquiries found that Pax World hadn’t kept investors from market timing its High Yield Fund during 2003, the Chicago Tribune reported.

Grant maintained during a Tribune interview that the Pax World funds issue was different than those affecting a number of other fund families caught up in the mutual fund trading scandal because Pax did not solicit the business in exchange for large investments from the market timers.

Although critics say the market-timing transactions raise expenses for long-term investors, a Pax shareholder letter from Shadek and Grant said the activity in the Pax World fund did not incur significant costs. “While we regret this situation, we believe that our shareholders did not suffer any material losses due to this activity,” the letter said.

Some funds linked to market timing and late trading have seen large shareholder pullouts, but Grant said the fund has seen no significant redemptions since the market timing was disclosed.

Market timers were able to park and switch money from other Pax funds by taking advantage of Pax rules allowing shareowners to shift assets among its funds without incurring the redemption fee intended to prevent market timing by making it prohibitively expensive, according to the company. Pax is in the process of restricting these “round trips” within its funds to once every 120 days.

“The difficulty in discovering and stopping this form of activity resulted, we believe, from a combination of our outside vendors’ systems limitations and a failure on our part to promptly recognize the significance of what was occurring,” the shareholder letter said.

The issue came to light in a call from the SEC Division of Investment Management alerting Pax to heavy trading trends in the fund. The SEC asked Pax to investigate the matter and provide a written explanation.

Shadek said he is confident that Pax will be able to put this unfortunate development behind it. “We’ve had no market timer trading, as far as we can tell, for over a year,” Shadek told “We believe, after our own internal investigation, that our shareholders were not materially damaged, but that’s our opinion. There’s a school of thought that rapid trading in and out of a fund, even if it’s of a legal variety, does hurt the long-term shareholder. If the SEC deems that there has been damage to the shareholders, we’re prepared to make restitution and pay fines and move on, but we hope it doesn’t come to that.”

An ongoing federal/state mutual fund industry probe has focused on market timing and late trading practices as well as certain sales techniques.