What is 'additional bid-offer spread'?

le_loup

Well, usually the difference between the bid/offer is the Initial Charge (which, of course you don't pay because you use a Discount Broker).
So I know what IP is charging because it's selling price is 5% more than it's buying price ... easily checkable on any portfolio checking site.
Maybe there are times when IP (and I'm only using them as an example) do have a creation price that is different to their selling price. I've not seen it.

gadgetmind

And people complain that premiums and discounts on Investment Trusts make them complicated!

Rollinghome

dunstonh wrote: »

It is a unit trust and not an OEIC. It is not single priced but has a difference between the buying (offer) and selling (bid) price.

To avoid any confusion, OEICs are not all single-priced and unit trusts are not all dual priced. Some are and some aren't.

For example Old Mutual have dual-priced OEICs and L&G have some single priced Unit Trusts.

Old Mutual UK Select Smaller Cos class A is an OEIC that currently has a bid/offer spread of 1.39% in addition to the stated initial charge. https://select.bestinvest.co.uk/fund-factsheets/omuksc/old-mutual-uk-select-smaller-companies-a/overview

L&G UK Index class R is a Unit Trust but has no spread.
https://select.bestinvest.co.uk/fund-factsheets/lgukin/legal-general-uk-index-r/overview

It's good to see Best Invest making the additional cost that can apply to both OEICs and UTs clear, unlike Hargreaves Lansdown.

For that Old Mutual fund Hargreaves Lansdown just say:
"Fund manager's initial charge 4.00%, HL saving on initial charge 4.00%"
without making it clear that despite being an OEIC the buy price is actually 5.39% higher than the sell price and not 4.00%.
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/o/old-mutual-uk-select-smaller-cos-accumulation

saveonarola

Thanks for that, Rollinghome. Very helpful.

@le loup. We may have been slightly at crossed purposes. I've just checked Invesco Perpetual Income (I assume that's the fund you were referring to) and it's an OEIC. Okay, Rollinghome has just explained that some OEIC's do have a spread, but I'm guessing IP Income doesn't, from what you've said, so it wouldn't have a bid/offer spread. Or rather, the spread would be absorbed into the single price quoted.

saveonarola

@Rollinghome

So, do you know what determines whether a fund has a bid/offer spread? Is it what Bestinvest told me, something about manipulating fund flows to ensure liquidity? (Not sure I quite understand that, but it sounds good!) Is it like any price, a measure of what the market will bear, so more popular funds should have bigger spreads? And is it something to worry about, or do you just have to suck it up, if you want to buy into a particular fund?

Rollinghome

saveonarola wrote: »

@Rollinghome

So, do you know what determines whether a fund has a bid/offer spread? Is it what Bestinvest told me, something about manipulating fund flows to ensure liquidity? (Not sure I quite understand that, but it sounds good!) Is it like any price, a measure of what the market will bear, so more popular funds should have bigger spreads? And is it something to worry about, or do you just have to suck it up, if you want to buy into a particular fund?

The pricing of OEICs and UTs is horribly complicated, and as gadgetminded says, much more so than ITs. It's not just IFAs who get confused.

At it's simplest, the "offer price" (the price the investor pays) is the "creation price" plus the "initial charge". The creation price is the value of the underlying assets of the fund plus the fund's notional trading costs for creating units/shares. The "bid price" (the price the investor can sell at) is the value of the assets minus the fund's notional trading costs for cancelling the units/shares. (You normally buy unit trusts as "units" but OEICs as "shares".)

It gets still more complicated when managers move to a "bid basis" or "offer basis" to manipulate the flow of funds. Those are the upper and lower limits for pricing permitted by the FSA.

Even more so as most funds are sold on a forward pricing basis so that the investor doesn't now how the manager will set the prices until after he has actually bought or sold. There's a useful explanation of pricing here http://www.incademy.com/courses/Unit-trusts-and-OEICs/Pricing-of-units---in-practice/8/1007/10002

Below is part of a chart I kept for the L&G High Income fund showing daily bid prices. You can see how the managers were randomly moving the price up and down on a daily basis by about 5%.

So the investor could place an order to sell at 11.30 am when the price was showing as 84p to find the price set at 12.00 am, the price he was paid, was only 80p. About 5% less than he expected despite the actual value of the fund's assets being completely unchanged .



Full sized image: http://i.imgur.com/7x7d5.jpg

With single price funds the trading costs are taken from the returns so that someone who invests for the long term effectively pays the trading costs of those more fickle who move in and out. It's near impossible to know what the actual trading costs of a fund are as the figure isn't included in either the AMC or TER figures. I think undeclared costs probably are something to worry about or at least take into account.

Being a simple soul, I tend to prefer ITs where the pricing is more transparent and which can be sold at any time the markets are open at a known and pre-agreed price.

saveonarola

@Rollinghome. Wow - thanks so much. Great post. There should be a way to recommend posts for some sort of end-of-year awards.

Maybe worth adding that Vanguard charge a dilution levy to cover trading costs, to make sure that long-term investors don't pay for investors who flit in and out. One of several reasons to love Vanguard.