OEICs verses Unit Trusts

jamesd

Most platforms like Hargreaves Lansdown completely eliminate the unit trust spread, with you buying at the bid price. The few exceptions are those where the purchase rebate isn't the same as the initial charge.

There can still be a small effective spread if the fund changes from a bid price on bid basis to offer basis and vice-versa but bid basis and offer basis are usually fairly close except for illiquid investments like property funds when everyone is trying to sell. Bid basis and offer basis for the bid price are not the same as bid and offer prices, in spite of the words involved.

OEICs move their single price within a window depending on the a balance of buying and selling and may also charge a dilution levy for large orders.

masonic, can't tell what happened in your case exactly, but was the one that you had a 5% spread on a property fund? Hargreaves Lansdown should be able to tell you what happened. If it wasn't property or something similarly illiquid there's always the chance that it was a glitch.

masonic

jamesd wrote: »

masonic, can't tell what happened in your case exactly, but was the one that you had a 5% spread on a property fund? Hargreaves Lansdown should be able to tell you what happened. If it wasn't property or something similarly illiquid there's always the chance that it was a glitch.

Not property, but it does have AIM holdings so some of the spread could be passed on from those. The spread is more significant in this fund than the others so I think there was some level of discounting applied.

Interestingly, the fund I ended up paying a 1% spread on had a notional Initial Charge of 4.5%, which was fully discounted, but the spread on the UT was 5.5%. This seems to hold with my idea that it is the 'Initial Saving' value that is applied against the actual spread.

psychic_teabag

I think someone on here posted a few weels back that they'd phoned HL to ask exactly what was meant by the initial saving on a UT. IIRC, the response was that there's a third "purchase" price which is not explicitly given, between the two listed prices. The buy price = purchase price + initial charge. HL then discount the initial charge part, so that you buy at the purchase price, which is stil a bit over the sell price.

Picking Schroder US MId Cap UT at random. Right now HL says
sell: 59.22
buy: 62.56
initial charge : 5.25%
initial saving: 5.25%

buy price / sell price = 1.056 = 5.6% spread

buy price = secret price + initial charge = secret price * 1.0525
HL discount the initial charge of 5.25%, so really buy at
the secret price = 1 / 1.0525 * 62.56 = 59.44p

So despite HL saying that they discount the entire initial charge, you still end up paying slightly more than the sell price.

Would be so much easier if HL just said what it was actually going to cost, rather than saying how much of initial charge you were going to save and making you work it out.

jamesd

HL can't know in advance what the pricing basis will be. That's decided by the fund management company on the day based on the split between buyers and sellers. The proportion of each order that is fulfilled using redeemed units and newly created units varies each day.

psychic_teabag

Sorry, yes. Those numbers are based on the previous days values. The point was just that the spread between buy and sell is larger than what HL publish as the initial charge, and their discount still doesn't bring buy price down to the sell price. (The reason I chose that fund was to then show the actual price I paid, and the buy/sell prices quoted on that day, but as it turns out I don't have a record of all the numbers.)

cepheus

From historic spread data there is no reason they can't provide an estimate, with the provison that an extra charge may be applicable under volatile conditions. Even then examples and experience could be used based on the volatility of the market. We are not interested in a guaranteed price to the nearest 0.1%, just transparency.

I think in terms of percentages not prices so for this one on the 4th

Sell : 127.20p | Buy : 135.30p 5.25% discount

the spread is 6.36% so I would have paid 6.36-5.25 = 1.11% on this date

Notice this seems to be the same as the total expense ratio which is given if you look. Evidentally in UT language that is the effective spread, the important figure. I wonder how many people realise that?

Ark_Welder

An OEIC may also charge a dilution levy on both purchase and sale of units. The purpose is to put the cost of the transaction onto that investor rather than on all the other investors currently in the fund. The levy can be thought of as the equivalent of a unit trust's bid/offer spread.

[Edit]
I have a holding in an OEIC that has a dilution levy of 0.5% on purchases and sales, so the cost of purchase is: single price + 0.5%. Proceeds from a sale would be: single price - 0.5%