Bid/Ask spread

mroller

Hi everybody,

This is my first post, so be kind with me :beer:

I have recently opened an investment Isa with Hargreaves Lansdown and I am considering which fund to buy.

Looking at the fund "Aberdeen Far East Emerging Economies" I see that last closing bid is 228.56 and last closing offer is 240.95. This is more than 5% difference which is huge. Is this the initial charge that the fund charges and which is supposedely refunded by HL? or an additional charge?

Many thanks.

Debt_Free_Chick

mroller wrote:

Hi everybody,

This is my first post, so be kind with me :beer:

I have recently opened an investment Isa with Hargreaves Lansdown and I am considering which fund to buy.

Looking at the fund "Aberdeen Far East Emerging Economies" I see that last closing bid is 228.56 and last closing offer is 240.95. This is more than 5% difference which is huge. Is this the initial charge that the fund charges and which is supposedely refunded by HL? or an additional charge?

Many thanks.

It's not far off 5% - I make it 5.42%. Looking back over a couple of historic prices, it often seems to be around 5.4%. Perhaps the extra reflects currency costs ?

I think the initial charge is completely separate. Essentially, the initial charge is deducted from the first investment so you end up with fewer units than you would have, if there were no charge.

I think this fund is to be converted to an OEIC, when it will move to single pricing for buying & selling. But, of course, the costs will still be factored in to the ultimate unit price.

baby_boomer

The initial charge is part of the bid offer spread, thankfully!

mroller

carnet wrote:

The initial charge is fixed by the fund management house - and is payable on every investment - apart from reinvested income (in some instances). Hence the necessity of using a discount service which can cut this to as little as possible.

The bid/offer spread incorporates the IC but also includes other costs.

Generally, the B/O spread is higher on smaller company/specialist funds which invest in more illiquid stocks. This would also apply if buying these stocks individually yourself.

On some funds the B/O spread can be as much as 7+ %.

Thanks all for your replies.
I conclude from your answer that If I buy the fund Through Hargreave and sell it straight away, I wouldn't loose the whole 5.4% but just a tiny bit of it?

BTW, Hargreaves say that the Initial charge is 4.25 and is refunded completely.

mroller

carnet wrote:

Yes, although I wouldn't call it tiny.

But why would you want to buy it and sell straight away .

BTW, IMHO there are one or two other (smaller) AP ex Japan funds with better prospects.



Correct. Although its not refunded, its discounted.

I am not planning to buy and sell staright away, that was just a theoretical situation to help explain my question better. If I buy, I will keep it for at least a month and why not a whole year if perf is good. :j

BTW, I am keen on hearing from you about funds with better prospects, of course the final decision will be mine, it's just to help me through the jungle of fund that is available at Hargreaves.

Cheers.

strawberrylane

I can confirm that the initial charge is included within the Bid-Offer spread. When you buy units in this (or any) fund they are 'created' at the Creation Price which is a price between the Bid and the Offer prices and reflects the costs incurred by the fund management company in creating the units. The Initial Charge is something separate and effectively represents the initial commission which can be paid out to a broker for selling the fund to a client (this initial commission is rebated in part or in full by most brokers now). The Offer price is then the 'Creation Price' plus the initial charge.

Some other things to bear in mind:
- there is no 0.5% stamp duty to pay on these fund purchases
- with most discount brokers (HL included) there is no stockbroking commission to pay

Hope that helps.

ReportInvestor

Excellent.

The only thing no-one has clearly explained is about the difference between the initial charge and the bid offer spread.

Who pockets it and how is it justified?

strawberrylane

The difference between the initial charge and the Bid-Offer spread represents the administration costs incurred by the fund management company in issuing the units that have been purchased. So, this amount is 'pocketed' by the fund management company concerned. The initial charge is the commission paid by the fund management company to the broker and these days more often that not is passed on by the broker to the client (so is 'pocketed' by the client). Hope that helps.

dunstonh

It should be noted that "Initial charge" and "bid/offer spread" are often the same thing. You go to one provider and their marketing men call it initial charge, go to another and they call it bid/offer spread.

mroller

strawberrylane wrote:

The difference between the initial charge and the Bid-Offer spread represents the administration costs incurred by the fund management company in issuing the units that have been purchased. So, this amount is 'pocketed' by the fund management company concerned. The initial charge is the commission paid by the fund management company to the broker and these days more often that not is passed on by the broker to the client (so is 'pocketed' by the client). Hope that helps.

Great stuff,

Thanks mate, that was very helpful.

afro_2

The way that bid/offer prices are created are described here: http://www.fidelity.co.uk/direct/guide/funds/bidoffer.html

Last week I bought two funds through Hargreaves Lansdown / fidelity for £500 each, and I was worried too as the buy/offer difference on the two funds were both over 5%.

There was no need to worry though, as the price I paid was only just over the Bid price, with the difference explained by the 0.25% charge.

After purchase, the value of my fund initially dropped to around £990. It's now grown to £1001