Why does this fund behave oddly?

ischofie1 · 11 November 2017 at 5:56PM

Ref - Henderson UK property pension fund.

A work colleague has the fund in his portfolio & every now and then it seems to jump approx 5% only to fall back down again.
This used to spike then drop the following day but recently a couple of these spikes have held for a while before falling back again.
Qu 1. Does anyone know what's causing these.
Qu 2. Now that these spikes seem to have a delay before they fall again, what is to stop people buying in to the fund then selling on a spike, thus gaining this 5%.

Thanks in advance.

dmelife · 11 November 2017 at 6:06PM

They drop the unit price to discourage investors from selling, in order to protect long term investors.

They did this post Brexit vote along with most other property funds, but Henderson were the last to put the unit price back up. As a result there were a lot of investors who immediately sold, resulting in the unit price being dropped back again.

It was initially due to the illiquid nature of these types of funds, but they should have sorted themselves out now and hold significantly more cash than pre-brexit.

ischofie1 · 11 November 2017 at 6:19PM

Thanks dmelife but that's really not what's happening surely.
I understand why property funds would drop the unit price if there was a run on the fund but property funds are stable at the moment.
Moreover the spike is upwards not down.

dmelife · 11 November 2017 at 6:51PM

That’s exactly what’s happening. Property funds in general are stable, but Henderson had a lot of pent up demand from investors looking to get out.

For a period of time the funds were temporarily closed so you couldn’t buy or sell. Everyone was waiting for the price to tick up 5% before they got out. They waited several months longer than the other funds.

What you have seen is the unit price go back up for a couple of days, then drop back down, then go back up for 1 day, then back down, then back up for a few days, then back down again. A spike cannot be just upwards, it’s a spike cause it’s gone up then down again very quickly!

dunstonh · 11 November 2017 at 7:14PM

Thanks dmelife but that's really not what's happening surely.

It is that. Bricks and mortar funds do that all the time.

Traditionally, bricks and mortar funds were used by long term retail investors (Mr & Mrs Average). Liquidity was rarely an issue. However, in the 90s, larger professional investors started piling in. Their money moves in out quicker and more frequently and is of much greater value. Totally unsuited to bricks and mortar funds. It creates instability that doesn't follow market trends.

Increasingly, bricks and mortar funds are going out of fashion. Property share has become more popular. It has increased investment risk but carries lower liquidity risk. And as property typically makes up no more than 5-15% of a portfolio, the volatility difference doesn't create a damaging swing in overall risk.

ischofie1 · 11 November 2017 at 9:25PM

Ok thanks Dunsronh & great to have you back.
So back to my 2nd question.
If I buy in to this fund now & the pattern is repeated, i.e. It jumps 5%..... I cash out at the jump & it retains this gain long enough for me to clear this "cash out", will I "lock in" this gain?

cjking · 12 November 2017 at 8:56PM

Without even looking at it, I'm going to guess that it's because they use a swinging single price.

There's usually a spread of that order (5%) between a property fund buying price and selling price. The spread is high because of the high transaction costs of buying property. On days when buying outweighs selling, all transactions (both purchases and sales) take place at the higher price, on days when selling outweighs buying all transactions take place at the lower price.

From google here is Standard Life (who run property funds) describing it:-

The swinging single pricing mechanism is a fair and flexible method for dealing with dilution issues that arise when a single priced fund experiences large inflows or outflows. The net asset value (NAV) of a fund is dictated by the latest mid-market prices of the underlying securities.

https://de.standardlifeinvestments.com/Swinging_Single_Pricing.pdf

cjking · 12 November 2017 at 9:01PM

I thought I'd paste in a more detailed explanation from the pdf I linked to.

The net asset value (NAV) of a fund is dictated by the
latest mid-market prices of the underlying securities.
Under a single swinging price regime, when the fund
experiences net redemptions or subscriptions the
price may swing to negate the impact of the expected
transaction costs incurred, if deemed significant. In
practice, net outflows mean the price swings down
while net inflows mean it swings up. The scale of the
swing is determined by the total of the transaction
costs. However, regardless of which way the price
swings and by how much, all investors buy and sell
at the same price. It should be stressed that the
swinging single pricing mechanism is not a charge and
does not benefit the manager of the fund

coyrls · 12 November 2017 at 10:56PM

ischofie1 wrote: »

If I buy in to this fund now & the pattern is repeated, i.e. It jumps 5%..... I cash out at the jump & it retains this gain long enough for me to clear this "cash out", will I "lock in" this gain?

You can't cash out at the jumps because your sell will be at the next valuation point, not at the current price that you see when you place your sell order.

ischofie1 · 15 November 2017 at 12:32AM

Thanks for all the replies.
I thought I understood things with the earlier replies but some of the later ones lost me.
I guess the critical thing is I can't cash out at the gains & lock them in so I'll just stick with my current prop fund that acts more normal.
I.E., just trickles up.

Why does this fund behave oddly?

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