For Rakhi Vasavada.............................
I am about to study your answer but meantime, can you explain what you mean by "If there was a need to repurchase or not is a different issue."
For Rakhi Vasavada.
I understand that the merit of the the repurchase is not being considered, however the effect of the initial oversale was the subject of my original question. Let me try and clarify this.
….. if £1350 had been raised initially and not the £3350, what would have been the outcome compared to what he actually did? (Let’s say that the account manager didn’t need all of the £3350 – he only needed £1350. He realised 3 months later that he had made an error by overselling too many units, so he used the £2000, from the oversell, to repurchase units.) If he had not oversold in the first place there would have been no repurchase later.
I have looked at your previous answer and comment as follows:-
1. Agreed starting point.
2. Here he uses £2000 to buy back units @ £1.2341 and receives 1620.574 units. There can’t be a gain because £2000 was part of the sum initially raised and the same £2000 is now being spent. What you could say is that the value of the 1620.574 units is less than the £2000 cost of purchasing them. This is because the selling price is less than the buying price on the same day. Buying price was £1.2341; Selling price was £1.1914. This means that the 1620.574 units which cost £2000 to buy, were worth 1620.574 x 1.1914 = £1930.75 on the same day.
Clearly, as a result of the decline of the unit prices between the two dates, the £2000 used to repurchase units at a price lower than the initial selling price will return more units. This means
£2000 @ 1.3207 = 1514.348 units in the original deal and
£2000 @ 1.2341 = 1620.614 units in the later deal.
The fund gains 106.266 units as you have said.
The problem with this is that these units were, on the day they were bought, actually worth less than they cost to buy.
The question remains - If units had not been initially oversold, would this have been better or worse, in cash terms, than what he actually did?
For Rahki Vasavada........
I have studied your last answer and suggest the following.
What if he had not sold any units in the first instance?
We know that the selling price of those units was 1.3207 each on the initial date. We also know that the value of the whole fund on this date is calculated using this selling price.
In a declining market, say 3 months later, the seliing price of each unit has reduced to 1.194. Of course, this reduces the total value of the fund.
Logically it follows that if you sold 1000 units on the first date you would make 1320, whereas if you sold 1000 units 3 months later you would only get 1194. Therefore, as one would expect, selling one’s shares or units in a declining market will loose money. The difference in the fund values on the two dates will quantify the loss.
In a bull market, with rising prices, the same action will result in a gain or profit. These are the market forces which determine values of all equity-based investments.
Surely, this is the same logic to be applied to my question and the comparative values are crucial.
In the first instance he sold units which he did not need to. On that date those units had a known value. 3 months later, all of the units in the fund were worth less than they were previously because of the bear market. Yes, he got more units for the same money but the fact is that their total value was less than it had been 3 months earlier.
It stands to reason therefore that if he had done nothing, the fund would still have lost value overall in the period due to the bear market but, because of his intervention, the fund lost more.
To me, this is logical. Can you dispute it and counter with alternative logic?