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  • FIRST POST
    • Wayne's Woes
    • By Wayne's Woes 31st Aug 17, 10:51 AM
    • 28Posts
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    Wayne's Woes
    Why do some funds have different Buy and Sell prices whilst others have the same.
    • #1
    • 31st Aug 17, 10:51 AM
    Why do some funds have different Buy and Sell prices whilst others have the same. 31st Aug 17 at 10:51 AM
    Why do some fund managers have different Buying and Selling Prices whilst others have the same for both.
    Examples
    Different Buying and Selling Prices; Old Mutual, Jupiter and Artemis.
    Same Buy and sell Prices; Schroder; Baillie Gifford; AXA Framlington; Investec; Threadneedle and Invesco.

    I am sure there are others in both categories
Page 1
    • talexuser
    • By talexuser 31st Aug 17, 11:46 AM
    • 2,254 Posts
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    talexuser
    • #2
    • 31st Aug 17, 11:46 AM
    • #2
    • 31st Aug 17, 11:46 AM
    Historically there was always a spread (different prices) where the difference represented the initial fee, or buying in price. When the retail review came in some years ago (and in preparation in many cases) investment houses started changing to single price, because obviously that is what customers prefer, and took up any difference in other fees. Now spread pricing looks like a bit of a historical anomaly and if there were two identical performance funds in a sector I wanted I would plump for the single price one, all other things being equal.
    • ColdIron
    • By ColdIron 31st Aug 17, 12:34 PM
    • 3,378 Posts
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    ColdIron
    • #3
    • 31st Aug 17, 12:34 PM
    • #3
    • 31st Aug 17, 12:34 PM
    Older style Unit Trusts may still have a spread while more modern OEICs will typically be single priced though there are exceptions
    • Linton
    • By Linton 31st Aug 17, 3:51 PM
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    Linton
    • #4
    • 31st Aug 17, 3:51 PM
    • #4
    • 31st Aug 17, 3:51 PM
    Split pricing is not necessarily a bad thing for long term investors. Under single pricing the costs caused by people trading shares in the fund are included in the standard charges and so are borne mainly by the long term holders. Split pricing hits frequent traders and so makes the charges less for everyone else.
    Last edited by Linton; 31-08-2017 at 3:53 PM.
    • Audaxer
    • By Audaxer 31st Aug 17, 5:38 PM
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    Audaxer
    • #5
    • 31st Aug 17, 5:38 PM
    • #5
    • 31st Aug 17, 5:38 PM
    Yes, I just found out when purchasing funds that some Artemis funds are dual-priced with a difference in the Buy and Sell price of over 1% in some cases, which I thought seemed like an underhand way of charging an initial fee.
    • grey gym sock
    • By grey gym sock 31st Aug 17, 7:13 PM
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    grey gym sock
    • #6
    • 31st Aug 17, 7:13 PM
    • #6
    • 31st Aug 17, 7:13 PM
    this is a very murky area, full of dodgy ways for fund managers to make money, at investors' expense, and often without the investors even realizing what's going on. surprisingly, this can even apply to funds which have a single price!

    there is a fair reason why some funds might have different prices for buying and selling units: they may incur significant unavoidable costs when they buy and sell investments. e.g. if they are investing in FTSE100 shares, their main cost should be 0.5% stamp duty on all purchases (plus much smaller amounts for dealing commissions and the bid-offer spread). or if they are investing in small companies, the bid-offer spread could be much bigger - at least a few percent. or if they are investing directly in real estate, the cost of buying and selling could be even more. OTOH, if they are investing in S&P500 companies, the costs may be minimal. so this varies for different funds.

    considering the case when these trading costs come to 0.5%, if £1m flows into the fund today (and is invested), and £1m is taken out of the fund tomorrow (and investments are sold to raise that cash), then the fund needs to do something (such as using buy and sell prices which differ by 0.5%) to ensure that it doesn't lose £5,000, to the detriment of longer-term investors in the fund. however, there are usually both inflows and outflows of cash on the same day, which can be partially offset with 1 another. e.g. if £1m flows in and £0.2m flows out today, then only £0.8m needs to be invested. and if, tomorrow, £0.6m flows in £1.4m flows out, then only £0.8m of investments need to be sold. 0.5% costs on £0.8m are only £4,000; on the total gross inflows of £1.6m over the 2 days, that is only 0.25% costs, not 0.5%.

    so what might the fund manager do, if they estimate that the round-trip costs for investing cash and selling the investment again is 0.5%, but that in practice the net costs (after partially offsetting inflows and outflows of cash) are more like 0.25%?

    1 possibility is: use buying and selling prices which differ by 0.5%, and pocket the other 0.25% for themselves. this is called "box profits". it seems pretty outrageous to me. apparently the FCA are thinking of banning this, in its most blatant form - i.e. box profits where the manager profits without taking any risk. (but there are most subtle ways this might come back - see below.)

    you'd think that a fairer approach was to use buying and selling prices that differ by only 0.25% . or, similarly, to do what vanguard do on some of their funds, which is to have a single price but set a dilution levy on purchases of 0.25% (or dilution levies on both purchases and sales, which add up to 0.25%). i note that vanguard explicitly say that their dilution levies go to the benefit of the fund, not to them. which i used to think was stating the obvious. but turns out not to be so obvious, when you find out about box profits.

    so what about single priced funds?

    there are really 2 questions:

    what can the manager do to protect longer-term investors from paying the costs of buying and selling investments when short-term investors jump in and out of the fund?

    and: how can managers use this process to make profits in a sneaky way at the expense of investors?

    the answer to both questions is that the manager has some discretion about the exact price they use - i.e. it doesn't necessarily have to be precisely the net asset value - a small premium or discount can be used.

    so they can protect longer-term investors by pushing the price to a premium on days when there is more cash flowing into than out of the fund, and to a discount when more cash is flowing out than in. which is OK for holders who aren't buying or selling on the day. but what about those who are buying or selling? it's very opaque for them: they don't know how much premium or discount is being used, or even whether it will be a premium or a discount on any day. they're actually taking pot luck on every purchase or sale: if they happen to buy at a premium or sell at a discount, they'll lose out; but if they happen to buy at a discount or sell at a premium, they'll actually gain. the pricing is always going to be chosen so that there are more losers than winners on any day; which is fair, in the sense that somebody has to pay for the trading costs; but it would be much fairer to have a dilution levy instead, to avoid the pot luck element and make the costs transparent.

    a further problem is that presumably the fund manager can choose to buy some units in the fund themselves on days when they happen to know (after seeing everybody else's buy and sell orders) that pricing will be at a discount, and to sell when they know pricing will be at a premium. i imagine this is the kind of thing the FCA had in mind when it said it was thinking of not banning all box profits for fund mangers, but only risk-free box profits. buying units in the fund does involve a risk - the investments held by the fund may rise or fall - but the table is tilted in the manger's direction if they can trade based on their knowledge of the day's premium or discount. and the manager's gains here can only be made at other investors' expense.

    surely the FCA should simply insist that all funds use a single price, not at a premium or discount, optionally with a dilution levy which is paid into the fund. their current plans appear to leave too much room for hidden charges to continue.

    1 lesson for investors is: minimize how often you buy and sell funds, because somebody may be profiting at your expense every time you do.
    Last edited by grey gym sock; 31-08-2017 at 7:16 PM.
    • greenglide
    • By greenglide 31st Aug 17, 7:34 PM
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    greenglide
    • #7
    • 31st Aug 17, 7:34 PM
    • #7
    • 31st Aug 17, 7:34 PM
    : use buying and selling prices which differ by 0.5%, and pocket the other 0.25% for themselves.
    Would the difference not remain within the fund rather than be "pocketed" by the manager?
    • grey gym sock
    • By grey gym sock 31st Aug 17, 8:12 PM
    • 4,098 Posts
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    grey gym sock
    • #8
    • 31st Aug 17, 8:12 PM
    • #8
    • 31st Aug 17, 8:12 PM
    Would the difference not remain within the fund rather than be "pocketed" by the manager?
    Originally posted by greenglide
    no: they are allowed to pocket it, though apparently most managers don't do this (at least: not any more).

    see SnowMan's comment: http://monevator.com/investment-platforms-and-fund-managers-roughed-up-in-fca-final-report/#comment-819807

    and this FCA consultation: https://www.fca.org.uk/publication/consultation/cp17-18.pdf pp. 25-7
    • greenglide
    • By greenglide 31st Aug 17, 11:27 PM
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    greenglide
    • #9
    • 31st Aug 17, 11:27 PM
    • #9
    • 31st Aug 17, 11:27 PM
    Hmm. Scary .....
    • NicksTheMan
    • By NicksTheMan 1st Sep 17, 9:26 AM
    • 41 Posts
    • 8 Thanks
    NicksTheMan
    Old Mutual funds appear to have the biggest differential between buying and selling prices. Is this an issue that the FCA are investigating.
    • bigadaj
    • By bigadaj 1st Sep 17, 2:30 PM
    • 10,012 Posts
    • 6,420 Thanks
    bigadaj
    Hmm. Scary .....
    Originally posted by greenglide

    Better not get onto stock lending then....
    • TwoSeniorCitizens
    • By TwoSeniorCitizens 4th Sep 17, 8:32 AM
    • 26 Posts
    • 7 Thanks
    TwoSeniorCitizens
    This factor is something we must bear in mind when considering purchasing any funds for a Stock and Shares ISA. When there is a differential between buying and selling then you must take this percentage into consideration. At least when you purchase funds with the same buying and selling prices you know where you stand at the outset.Having looked into this point since this subject was posted I would agree Old Mutual appear to have the largest span between buying and selling prices
    • jamei305
    • By jamei305 4th Sep 17, 9:08 AM
    • 198 Posts
    • 246 Thanks
    jamei305
    Where the spread includes a percentage initial fee, sometimes this element is refunded. For example iShares Emerging Market Equity Index H Acc currently has a spread of 160.0p - 168.80p. This 8.8p spread is made up mostly of the initial charge - 5% of 168.8p i.e. 8.44p which is refunded on most platforms e.g. HL. The actual purchase price would be 160.36p giving a spread of roughly 0.2%.
    Last edited by jamei305; 04-09-2017 at 9:31 AM.
    • Wayne's Woes
    • By Wayne's Woes 12th Sep 17, 5:01 PM
    • 28 Posts
    • 2 Thanks
    Wayne's Woes
    Maybe I can save money by going through a Management Investment company like Hargreaves or Elson Associates (a recommendation) who often do not make the initial charge of between 3% and 5% which is made when investing directly with the fund like Old Mutual, Fidelity,Schroders etc. Charges and spreads seem to be a bit of a minefield.
    Last edited by Wayne's Woes; 12-09-2017 at 5:19 PM.
    • dunstonh
    • By dunstonh 12th Sep 17, 5:04 PM
    • 89,534 Posts
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    dunstonh
    Old Mutual funds appear to have the biggest differential between buying and selling prices. Is this an issue that the FCA are investigating.
    Why would they be investigating?

    Maybe I can save money by going through a Management Investment company like Hargreaves or Elsons who often do not make the initial charge of between 3% and 5% which is made when investing directly with the fund like Old Mutual, Fidelity etc. Charges and spreads seem a bit of a minefield.
    There is no intial charge and a reduced spread (sometimes to zero) when using a platform. Hardly anyone buys direct anymore.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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