Buy/Sell spread on investment funds

Glastoun

The funds I'm currently invested in have the same buy/sell price, and I thought this was standard with funds. But a couple that I'm looking at have a sell price of 6% less than the buy price. Why is this?

Is this effectively a 6% fee on these funds? Why would I choose them when there are many others that buy/sell at the same price?

Linton

Glastoun wrote: »

The funds I'm currently invested in have the same buy/sell price, and I thought this was standard with funds. But a couple that I'm looking at have a sell price of 6% less than the buy price. Why is this?

Is this effectively a 6% fee on these funds? Why would I choose them when there are many others that buy/sell at the same price?

Funds can cover their costs by a bid/offer spread and/or by simply taking money from the invested funds and so reducing the return. This is one of the differences between old "unit trusts" which tend to have the spread and the modern "OEICS" which dont. In the long run I dont think it should make too much difference.

Another thing that can happen is that funds which are becoming too large for the investment opportunities available in their chosen sector may impose a purchase charge to discourage new investors.

westy22

If you buy UTs through a discount broker such as H-L (others are available!) then they would normally discount the spread by 5% in the same way as they would by not making an initial charge on OEICs. You would therefore find that the spread on purchase was either eliminated or significantly reduced.

Glastoun

It would be through HL, and one of them is Marlborough Special Situations:

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/marlborough-special-situations-accumulation

They discount the 5% initial charge, but there is still a 6% difference in the buy/sell price.

IronWolf

Are they Investment Trusts or funds? Either way, yes it's a charge going to either the fund or the market maker.

Many funds have an initial charge to disuade investors from putting more money in

le_loup

Read up on Creation Price.

westy22

They discount the 5% initial charge, but there is still a 6% difference in the buy/sell price.

I still think that the 6% spread includes the 5% initial charge which they won't charge - effectively bringing the spread down to 1%. Try giving them a ring - they will answer that query for you within seconds.

Linton

Glastoun wrote: »

It would be through HL, and one of them is Marlborough Special Situations:

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/marlborough-special-situations-accumulation

They discount the 5% initial charge, but there is still a 6% difference in the buy/sell price.

Over the past 10 years the fund was 2nd in its sector with a value improvement of about 7-fold. With that level of return a 5% lower selling price really doesnt matter: reducing the return by 5% wouldnt have changed its ranking. You buy a fund like Marlborough SS because you believe you will get a extremely large return over the long term. If you are worried about the odd +/-5% then probably MSS isnt the fund for you. Go for a less ambitious fund with perhaps a 2.5 fold improvement over the past 10 years (eg HSBC FTSE100 tracker) but with no 5% reduction in final selling price.

Glastoun

Comprehensive reply from HL - more like 1% than 6%, which is good news, thanks westy22 for making me check that:

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Unit trusts (such as Marlborough Special Situations) quote two prices, the bid price and the offer price. The bid price is the price at which units in the fund would be sold and the offer price is the price at which units would be purchased assuming the full initial charge levied by the fund manager was incurred i.e. if no initial saving applied. The bid-offer spread tends to be around 5.5% - 6.5% dependant on the particular unit trust as well as demand for the fund at the time.

If we are able to offer a full saving on the initial charge for a unit trust (as we can for the Marlborough Special Situations fund) then this would mean that units would be purchased at the creation price. This is between the bid and offer prices but is closer to the bid price, it tends to be in the region of 0.5% - 1% above the bid price. This is the price at which new units in a unit trust are created and is lowest price at which units can be bought.
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