Warning for people using Hargreaves Lansdown

Ark_Welder

cepheus wrote: »

According to my calculations the price I paid (620.59 on the 14th October) was effectively the full spread without the discount, which looks very suspicious. Does the explanation Framlington or HL gave make any sense to you?



Neither can I see wild movements in markets on October 14th either, it all looks quite normal for the last few months at least!

The following PDF from HL describes in a bit more detail:

http://www.hl.co.uk/__data/assets/pdf_file/0016/32542/The_HL_Guide_to_Fund_Prices,_Savings_and_Yields.pdf

Located at http://www.hl.co.uk/investment-services/vantage-service/frequently-asked-questions#50109

Also in their Key Features document under Fund Savings & Charges:
http://www.hl.co.uk/__data/assets/pdf_file/0013/37120/Vantage_Key_Features.pdf


What it is saying is that you would always buy unit trusts at the creation price regardless of what the offer price might be. So on the particular day that you bought you would still have paid the same price if the units had been valued on the usual basis.


I would surmise that this situation would be the case for all platform providers that discount the initial charge, and not something that is specific to HL.

cepheus

So it seems that if there are more people selling units than buying them, the client obtains a price about 5% worse than what they would have done if the opposite was the case (based on my experience anyway). So you need to gain 5% just to get even!

This sounds outrageous to me. It's hardly a rare occurance that more people sell than buy units surely?

So on the particular day that you bought you would still have paid the same price if the units had been valued on the usual basis.

The point is that this day wasn't particularily unusual to any other day, no large swings in prices or anything like that.

atush

Personally, I woudl write a letter of complaint and ask for the 5% to be refunded as you hadn't been informed of the change. Lots of times companies will refund charges on an ad hoc basis.

cepheus

Presumably I should get the official bid price on the day when attempting to sell this fund rather than some re-adjusted lower price?

dllive

Hi all,

The fund that was soft closed is Baillie Gifford Emerging Markets Growth fund.

My argument is that they email me information about the specific funds that Im currently invested in. However, they dont email me to say that the fund has soft closed and so Im now getting stung the whole 5% charge!

If HL dont know which funds Im invested in, then yes, the impetus should be on me to keep tabs on the fund's news. But the fact that HL knows which funds Im invested in, and uses it as a tool to up-sale other funds to me, I think its very bad form of them to not tell me when a fund soft closes. I dont know why they choose to operate this way, because it only goes to pee of a customer (me) and now Im looking to take all my investments away from managed funds and put into index trackers. If HL had been honest to begin with then I would have reallocated that monthly investment into another fund.

I havnt seen a page on the HL website with a list of funds that have soft closed, and I can pretty much guarantee one doesnt exist.

Ill speak to the FOS and see what they suggest.

dunstonh

Some First State funds are to soft close in January:

Asia Pacific Sustainability
Global Emerging Markets Sustainability
Greater China Growth
Indian Subcontinent
Latin America

First State will be making a compulsory initial charge of 4% to all new investments in the affected funds. Existing investors who maintain regular contributions will not be affected.

Ark_Welder

[QUOTE=dllive;48423587The_fund_that_was_soft_closed_is_Baillie_Gifford_Emerging_Markets_Growth_fund.[/QUOTE]

How do you know that the fund was soft-closed? The latest factsheet and simplified prospectus (August 2011) available on BG's web-site do not mention soft-closure, and the application form still states a minimum lump-sum of £1000.

http://www.bailliegifford.com/documents/93482_Emerging_Markets_Growth_Fund_Class_A_Simplified_Prospectus_General_Information_Booklet_and_Apps_0811.pdf

thelawnet

Ark_Welder wrote: »

The following PDF from HL describes in a bit more detail:

http://www.hl.co.uk/__data/assets/pdf_file/0016/32542/The_HL_Guide_to_Fund_Prices,_Savings_and_Yields.pdf

Located at http://www.hl.co.uk/investment-services/vantage-service/frequently-asked-questions#50109

Also in their Key Features document under Fund Savings & Charges:
http://www.hl.co.uk/__data/assets/pdf_file/0013/37120/Vantage_Key_Features.pdf

What it is saying is that you would always buy unit trusts at the creation price regardless of what the offer price might be. So on the particular day that you bought you would still have paid the same price if the units had been valued on the usual basis.

I would surmise that this situation would be the case for all platform providers that discount the initial charge, and not something that is specific to HL.

Some numbers first, for illustration, let's assume, for simplicity a Unit Trust holds only Acme Widget shares in its portfolio

Acme Widget shares are 'worth' £100 according to the FT - net asset value
In large quantities, it might cost you £102 to buy a share, inclusive of taxes, dealing costs, bid/offer spread - creation cost
And if you sold them you might realise £98 - cancellation value

The rules are here:

http://www.fsa.gov.uk/pubs/rules/r199.pdf
Read p27-28, also 4.09-4.13

Legally the minimum redemption price is then £98 and the maximum issue price is £107.61.

There are no restrictions as to the spread between these two, other than that the bid and offer prices must not fall outside the cancellation + creation + charge prices respectively. In the case of something like a property trust or small companies, the spreads will be higher than say UK blue chips.

In practice, the theoretical maximum spread between cancellation price and creation price (plus the charge) will rarely be used, because in a heavy-inflow situation, the creation price is key and sold units are merely being transferred to new buyers.

So in summary if you have a 2% bid/creation spread costs the actual dealing spread will probably be more like 1%, plus of course the 5.5% charge, so say a 6.5% spread.

The FSA note that when pricing on a cancellation basis (typically if there are more sellers of the units), the redemption price will be close to the minimum i.e. the cancellation price (to reflect the fact that assets 'worth' £100 are only realising £98 after costs, so it's not really sensible to give them £100 for them), but the spread between buy and sell stays basically the same as when there are more buyers, to reflect that fact that any buyers are taking on the units from the large number of sellers.

It seems to me that there is no practical difference between charging a buyer of a sellers units 6% more than the cancellation price, and charging the buyer of a new unit 6%, however it seems that the FSA/HL does not agree.

So to go back to our original numbers we have:

£98 - value if your unit is redeemeed - this is the minimum legal SELL price
£100 - underlying value of the assets
£102 - cost of creating a new unit
£102*1.055 = £107.61 - maximum legal issue (BUY) price

If the bid/offer spread is (essentially arbitrarily) fixed by the Fund Manager at £6, that means the bid/offer prices could then be anything between

£98 (Minimum legal redemption price)/£104
£101.61/£107.61 (max legal offer price)

Unfortunately for the consumer the true costs are hidden away in the pricing, the fund manager is allowed to hide both a charge and the actual costs there.

There doesn't seem to be any reason why, if the units are priced on a cancellation basis, they shouldn't discount below creation cost, but it seems they don't. This situation might be fairly rare and largely of academic interest, but in the first case with the £98/£104, you only save £2, under 2%, not the quoted 5.5%. Basically I guess the fund managers are not going to give you something for nothing by selling below cost, even if they do need your cash!

Obviously this is a bit of a pain if you are looking at H-L's prices, since they don't actually bother to quote the creation price.....

With reference to dunstonh's comments from the AXA fund in question:

Bid/offer spread at 14/01/2011 8.17%
(8.17% is the current maximum permitted under Statutory Regulations with the current initial charge).

The initial charge is 5.25%, so what this means is (as of 14th January) the spread between redemption and cancellation was 2.92%, and they were therefore redeeming at the minimum cancellation value and issuing at full creation value + costs. Why? Because they can, I guess.

HL have it back to front about sliding the creation price closer to the offer price. What they can do is slide the offer price closer to the creation price. Based on the current spread, if they are pricing on full bid basis, that would mean that with the units at £5.964 each, the creation price is therefore 5.964 *1.0292 = £6.138. With the selling price £6.345, you are 'saving' 21.7p, around 3.37%. Of course this is rather !!!! backwards, you are not really saving, merely avoiding a charge, which at present is (possibly) lower than the published 5.25%.

There's just one problem with this analysis - if they are/were soft closed, such a pricing strategy penalises sellers and encourages buyers. Which is hardly logical....

cepheus

Well Dunstonh no longer thinks the Framlington one was soft closed. However, I have made a complaint to HL anyway largely on the basis of their initial estimate of spreads for that fund approx 1%, and the general opaqueness of unit trust prices.

Yes, you would think if there were more sellers than buyers it should be cheaper to buy. However we are living in the esoteric world of unit trusts not shares! I can understand futures, spread betting, even equity opion prices, but unit trust prices are the most obscure and complex of all.

thelawnet

cepheus wrote: »

Well Dunstonh no longer thinks the Framlington one was soft closed. However, I have made a complaint to HL anyway largely on the basis of their initial estimate of spreads for that fund approx 1%, and the general opaqueness of unit trust prices.

Yes, you would think if there were more sellers than buyers it should be cheaper to buy. However we are living in the esoteric world of unit trusts not shares! I can understand futures, spread betting, even equity opion prices, but unit trust prices are the most obscure and complex of all.

They are making it cheaper to buy, but only for people buying it with full upfront commission. For those buying it discounted, it's effectively more expensive because with H-L you always buy at creation price (plus possible 0.25%-0.5% in a few cases) whereas the sell, at which you can redeem your investment is at the lowest legal level.