property funds playing dirty games

jamesd

mroller wrote: »

basically, the have shaved 6% off the value of the fund :mad: ... what they did is discouting the value of the units by a further 6% relative to the NAV

Nope. They have stopped subsidising sellers at the expense of those who don't sell because there are enough sellers that the effect of the subsidy would be significant. That is, it's just stopped showing an artificially high buyback price and is now showing you the real Net Asset Value (NAV) of the units.

There are two key values for a unit trust (and a hidden similar pair for OEICs). First is the creation price. This is the cost of buying the investments held by the fund on the stock exchanges. It's what the fund has to pay to create a new unit when someone buys one.

Second is the cancellation price. This is the revenue received when the underlying investments are sold on the markets. It's the true revenue received if units have to be sold if there are more sellers than buyers.

These are the equivalents of the buy and sell prices for a share on a stock exchange.

There's a significant spread between the two prices and in tough times of high purchases or high sales these are the real costs for the fund and the real prices that must be used.

Now, normally there are reasonably similar numbers of buyers and sellers, so the fund will buy back units at a bid price above the cancellation price, knowing that the effect on those who continue to hold is not significant. This is the offer basis buy back pricing.

However, when there are substantially more sellers than buyers, the subsidy in the higher offer basis price would hurt the people who keep the units too much so the fund has to switch to bid basis and buy back at the true unit cancellation price.

The difference exists because people don't like a large spread between buying and selling prices, so if it's practical the small subsidy will be used to make it more attractive, particularly to small investors. Institutions buying or selling large quantities my have to pay the real prices at all times but they understand how it works and aren't surprised by it.

One other price is the full offer price. That's the price you pay if you buy directly from the fund manager or a broker and pay the full initial charges for the fund. It's the creation price plus the initial charge.

It looks like this, low to high:

Cancellation price, same as bid price on bid basis.
Bid price, on offer basis
Creation price
+ initial charge = full offer price.

OEICs give a single price but actually shift the price up or down within a tunnel to reflect the fluctuation in demand. Single pricing for the same reason as the artificial offer basis bid price: people don't like large spreads and it seems simpler for consumers.

As you've seen, one consequence of this can be to make the price drops look more severe than they really are during a sell-off.

jamesd

moneyandmountains wrote: »

When you have a trade / settlement period, I had thought it was the price on the trade day that applied.

There are three different effects.

First the one that may have applied in your case. The fund can try to be as prompt as possible but it's obliged to give everyone selling between two valuation points the same price because it's required to treat all unit holders equally. It's possible that if you'd called them directly they might have told you that the volume of sales meant that they were going to have to use bid pricing. If your broker didn't tell you this when you placed your instruction, ask them when they found out and if their online systems were showing the offer basis price after they knew that bid basis would be used.

If it was a gradual thing and they decided to make an announcement after the markets closed, before the next valuation point, see the second reason. This would give people checking the news in the evening - notably small investors - a chance not to sell or to attempt to contact their broker and cancel a previous sell instruction.

Second, funds use forward pricing. That is, you get the price at the next valuation point after you place the order. That could be on the same day if you say you want to sell before the valuation point. It's often noon, but varies; you'll see it mentioned in most fund fact sheets.

Markets trade at all times officially or unofficially all around the world. Say Asian prices drop. You then know that funds with Asian holdings are going to have a lower value at their next price point, so you decide to sell. If you get the previous day's price point, you just traded with knowledge of events after the price was set.

What actually happens is that you get the price at the following valuation point so you can't escape the effect the events that have already happened have had on the value of your units.

This method is used because of the problem I described: people used to trade at yesterday's price based on certain knowledge of later events, effectively seeing the future before deciding what to do. If you want to make me rich, just let me buy and sell at the last quoted price instead of the next one.

Finally, if your broker is aggregating many small trades you might miss that day's valuation point even if you placed your individual order before it. This is an issue between you and your broker. It lowers the price of trades but it's not free of cost.

moneyandmountains

jamesd wrote: »

If it was a gradual thing and they decided to make an announcement after the markets closed, before the next valuation point, see the second reason. This would give people checking the news in the evening - notably small investors - a chance not to sell or to attempt to contact their broker and cancel a previous sell instruction.

Second, funds use forward pricing. That is, you get the price at the next valuation point after you place the order. That could be on the same day if you say you want to sell before the valuation point. It's often noon, but varies; you'll see it mentioned in most fund fact sheets.

Markets trade at all times officially or unofficially all around the world. Say Asian prices drop. You then know that funds with Asian holdings are going to have a lower value at their next price point, so you decide to sell. If you get the previous day's price point, you just traded with knowledge of events after the price was set.

What actually happens is that you get the price at the following valuation point so you can't escape the effect the events that have already happened have had on the value of your units.
.

Situation was:
Broker H&L
Order placed evening of 9th, so forward pricing would mean the next valuation point was the 10th.
Announcement was publicly available on the evening of the 10th.
No point in crying over spilt milk, after all this was just part of a portfolio. However, it does seem a bit underhand.

wellsie82

is this is a good time to "swtich" out of such property funds? it's probably a bit late now but I had £500 in a ISA with L & G in the "L & G UK Property Trust" and I was making a good 8-9% and now it appears to have halved

will this "bounce back" or am i best off out for a while?

dunstonh

It may be a good time to switch in to one. Although I would focus on the funds with a higher cash content. With pension/life property funds, I would also look towards those that do not have a unit trust fund version. Life/pension funds tend not to suffer outflows as much as unit trusts.

Economy is still strong and historically returns are more aligned with GDP than anything else.

jamesd

moneyandmountains wrote: »

Situation was: Broker H&L Order placed evening of 9th, so forward pricing would mean the next valuation point was the 10th. Announcement was publicly available on the evening of the 10th.

I've noticed that they seem to do my trades on Wednesday and Friday even if I put the orders in on Sunday or Monday. This may be a standard feature of their offering, or perhaps only for the sizes of orders we place. If you do ask, please let me know what they say.

Mr_Mumble

Buying illiquid assets within open-ended collectives, such as unit trusts and OEICS, is quite barmy!

The fund manager cannot accurately portray the value of units when there is a surge in fund purchases or sales. Nor can a fund manager act in the best interests of the unit/share holder when they are forced to sell, or purchase, property to keep asset value coupled to the funds value. Such funds could hold a large amount of cash to help protect from such inflows and outflows but then it isn't much of a property fund!

Close-ended investment vehicles (investment trusts and companies) should be used when the underlying assets are illiquid (property, private equity, hedge funds). If there is a sudden rush to sell a property investment trust the price will fall. However, there will be no material effect on the underlying assets or their performance.

moneyandmountains

Mr_Mumble wrote: »

Buying illiquid assets within open-ended collectives, such as unit trusts and OEICS, is quite barmy!
.

However, many of the property funds that have implemented restrictive measures also invest in property shares and cash for liquidity. This is why their argument about being forced to move to cancellation pricing is silly. It had been the property share aspect e.g. REITS etc. that I doubt that there will be any real b&m sales to meet these outflows.

EdInvestor

Mr_Mumble wrote: »

If there is a sudden rush to sell a property investment trust the price will fall. However, there will be no material effect on the underlying assets or their performance.

In effect this is what has happened here with the unit trusts.The problem is that the outflows appear to have been allowed to mount up and the adjustment when it came has been abrupt and large - unlike the fairly gentle drift downwards we have seen in the ITs over the past 6 months or so.

In addition,the risk that this might happen has not been adequately explained to U/T and life/pension fund investors - thus creating a further risk that people will misunderstand the situation, think that the value of the underlying assets is crashing, take the hit and depart, thus creating further outflows, possibly requiring further downward adjustments.

A move designed to stop a run could actually end up causing it.

mroller

EdInvestor wrote: »

A move designed to stop a run could actually end up causing it.

New Star say the measure is temporary. The trouble is that the day they try to revert to normal pricing, there will be a wall of money trying to leave the same day.

can't see how they are going to revert, unless they freeze redemptions or something.