Timing of switches between funds

the_learner

Hi all,

I have an ISA with Fidelity and I'm trying to understand what is the timing for a deal.

Looking at the "dealing and settlement times" page in their website these are the main information I see:

"for most products we will carry out your buy or sell instructions on the day we receive them, as long as they arrive before the dealing cut-off time of 11am".
"switch transactions will normally be processed within the course of two consecutive days, as long as they arrive before the dealing cut-off time of 11am".
"Funds are normally priced at 12 noon".
"Fund prices are set on a forward – pricing basis which means the price is determined at the next valuation point and you will not know in advance the exact price you will pay/receive".

In addition to that, they also say (in the settlement page): "payment will usually be made within 7 business days of receiving your full and valid instructions".

I'm very new to fund investing and I see that it is very different compared to ETF for which you can buy and sell instantaneously.
So I hope I'll get your help to understand what timing I should expect cause the above sentences are not 100% clear to me.

I'll make an example.

I decide to invest in Fund A and suppose that it is replicating perfectly the FTSE100.
On day 1 (tomorrow) I send the order to buy quotes of Fund A and I do this before the dealing cut-off time of 11am.
They say that "Funds are normally priced at 12 noon" so what I understand is that the price they will have at noon will reflect all the movements occurred to FTSE100 up to that point in time.

First question: is that correct?

Ok, I will send the order before 11 am so I am expecting to have quotes in my portfolio at the price that will be determined at noon tomorrow (day one). This implies that I will be exposed to FTSE100 moves from noon tomorrow onwards.

Second question: is it correct to expect this?

Day one closes negative for FTSE100 (suppose -3% all done in the afternoon). I should have my fund quotes priced before the market drop thus my position should have been affected.
On day two I decide to switch to Fund B cause I have already hit my stop loss. On day two before 11 am, I send the order to switch from Fund A to Fund B.

If the answer to my second question is positive, I should then expect to get out from Fund A at the price that will be fixed at noon on day two. In other words, I will be exposed to FTSE100 movements just until noon on that day, with a market exposure that in this example has been 1 day. From that point I will be only exposed to Fund B (suppose it's cash fund).

Third question: can I do that? Can it actually be so quick? Does the 7 business day settlement time play a role in this? Or does it matter just for the first investment (when you actually move money from your bank to Fidelity)?

Hope this example helps to understand my doubts. Of course is an extreme case of a quite fast deal but it's just to understand how things work and what I can expect in terms of timing.

Thanks for your help.

the_learner

Hi, nobody can help me on this?

Thanks.

bowlhead99

I don't know the workings of Fidelity specifically but basically OEICs and Unit Trusts are future priced and you have to get your order in before the cut-off to be included in that round of subscriptions or redemptions. They will then buy you in or sell you out at that next opportunity.

However, even if the price for a day is published at noon it doesn't mean it's real time valuation that you can access by putting an order in an hour earlier (i.e. if you like the FTSE value at 10.59 AM you can't necessarily buy into the 12.00 price by putting your order in at 10.59 AM).

That asset value / price being published at noon might relate to all the valuation and accounting data based on the end of previous day. For example if you're in a fund with global investments, the NAV might be calculated based on close of business of each individual market, or the last one to close being late afternoon US time, i.e. late into the evening our time, and then all the asset valuations are added to the expense estimates and the accrued dividend income etc to work out the price. There are often a lot of holdings and a lead time to do this so the price based on late night Monday market close comes out at lunchtime Tuesday.

So, if you request to join the party at 11am Tuesday, you pick up the market changes from the valuation point at which you bought in, not the pricing publication point.

Depending on how it works with the individual manager concerned, and you could easily check this with the fund manager or the platform provider, you might find that placing an order at 11am Tuesday gets you in to buy at the next NAV point that ultimately gets calculated as of Tuesday night's underlying market prices and is published on Wednesday at which point it's used to derive how many units you get for your £1000 contribution or how many £ you pay for your 1000 units. In this way, you are committing to subscribe or redeem based on pricing you don't know, because at the time you place the order the market hasn't stopped moving for the day.

It has to work on a 'future price' system. Otherwise, let's say I want to invest in a global fund which is 50:50 US and UK equity index. The markets might have a real low value on Monday night because there's a world war going on and an election result pending where the favourite for president is going to increase taxes massively. So the asset value of all the companies are heavily depressed at close of play Monday which are the prices used to assess the value of the fund and ultimately calculate the value per share which we'll announce the next day.

Then on Tuesday morning we hear the "bad guy" president lost the election, taxes are going to stay low, and the war has been called off. So at 10.59am ahead of cut-off, you decide everything is good and you'd like to invest in an index fund. In only an hour from that point, they'll release the low low valuation that they are calculating from last night's data. But they won't let you in at that low low price that they announce at noon, because the fund assets at the time you made your investing decision are potentially now a lot higher than they were when they were last looked at for accounting purposes. They won't let you create new units at the old low price, and they won't stop the clock in the middle of the day to calculate a new 'live' price. You can come in based on the next price which is based on Tuesday night's market data. Your contribution will be accepted and will settle in a few days time.

Generally once you have committed to buy into a fund, your cash is blocked by the provider so you can't spend it (unless you cancel the order before cut-off). If you keep your order open past the cut-off point, it will get a firm price at the next valuation point and then once that price is known, the money and number of shares are firmly destined to settle in a few days time. The settlement might be T+3, making the whole process T+4 including the protracted cut-off process.

Depending on your provider and the fund concerned, if you are selling out of one fund to switch to another, you can usually only book the order to buy the new fund when the price has been established for how much you're getting out of your old fund, leading to a delay between exiting one and getting into the next.

You don't usually need to wait until the proceeds from the first trade have fully settled (4 days) to be able to place the second order, because they know you are good for it as they can see the first order has been accepted. But if you don't have a lot of cash on account as a buffer, you may struggle to place two orders together to buy one and sell the other, unless they are officially linked as a 'switch' where 100% of the proceeds from Fund A is known to be destined for Fund B.

Hope this helps, and isn't too inaccurate, but to be honest I don't use many OEICs or worry too much about the day to day value. The person with all the answers as to how a hypothetical scenario would work in practice, is the platform provider or the fund manager. Maybe send the questions to them. But the short answer is yes, dealing with a commitment to subscribe or redeem at a future price is very different from ETFs where the price changes every second based on supply and demand that second.

With the ETF you decide if you like the price and buy it or sell it instantly (with T+3 settlement). And then to avoid a huge discount or premium to underlying asset values, units will be created or dissolved as needed during the course of the day or week. With a Fund, you can't decide on a market price entry point. Instead, the manager sits back and assesses all the pending orders and redemptions once a day, and creates or redeems units at an appropriate price, based on what the 'fair' value of those units is considered to be (considering also the costs of handling the joiners and leavers and deploying the new cash into underlying assets).

This quirk also means that you can't really set a 'stop loss' to tell your platform that you want out whenever the market price moves through a particular virtual barrier in real time. There are no market prices sweeping up or down that your platform can monitor to be able to submit an order at the appropriate time on your behalf. If you were happy to buy at £2 and the published price moves down to £1.99 on a Wednesday, your platform can't submit an order for you then, because the next price they deal at on the Thursday might be £2.10 which wasn't what you wanted. So generally you don't get to place stop or limit orders on Funds (though perhaps some platforms might offer it somehow).

PeakOwl

Thanks for your insights, bowlhead, very informative.

As with ETF's, the ability to receive and trade against a live instant quotation is just one of the reasons I generally prefer to buy similar/equivalent Investment Trusts rather than OEICS, when I'm looking for such an investment.

the_learner

bowlhead99 wrote: »

...

Thanks a lot bowlhead, this was very helpful.
For a series of reasons I am not allowed to use ETFs so I have to stick to funds if I want to invest my money.
That's the reason why I am concerned about timing.

Suppose that I have a system that gives me a buy signal on a day. This system has been backtested based on the hypothesis that: at market close today you have a signal to buy and you should enter the market at open tomorrow.

If at day T I decide to buy 1000£ of Fund A and enter the order before 11 AM, they will process my order on that day.

If the next valuation point is noon, this should mean that I could have 1000£ invested in Fund A at the price that will be determined at noon of day T. After all, if the market they invest in is open, at valuation point they can have a realtime price and can buy 1000£ of the underlying market at that price. As a result, I should have my quotes at the NAV as of day T, which means I will be exposed to market moves from noon at day T onwards.

This should be the case if Fund A invest in an european market (e.g. FTSE100).

But suppose I want exposure to S&P500. At noon of day T there will be a valuation point and that price cannot be realtime since the US market is still closed.

So I send the order to buy 1000£ of this fund before 11 AM of day T. At noon they will price the fund based on market close of day T-1. I will not enter the market at that price but most probably at next valuation time which is noon of day T+1. This price should be based on S&P500 prices as of market close of day T.

In this case, the quickest entry I could have is market close of day T, as long as I enter a buy order before 11AM day T. The NAV will be determined at noon of day T+1 but should be as of day T.

And that's the quickest entry I think, if I intend to use US markets.

At this point I am wondering if it make sense to prefer european markets as long as they let you enter the market at a price which is as of noon of day T, instead of market close of day T.

What do you think?

Thanks a lot for your help.

the_learner

P.S I am trying to ask the question to Fidelity but I'm still waiting for answers. Plus I would rather prefer to know what's the experience of customers like you when dealing with funds. They will probably repeat what I can already read on the webpage but that's not necessarily what happens in real life.

bowlhead99

the_learner wrote: »

Plus I would rather prefer to know what's the experience of customers like you when dealing with funds.

The short answer is that unlike you I'm not looking to actively trade based on technical analysis or charts, so I don't get 'buy signals' and don't have to immediately react to them.

I'm more for investing on a longer term buy and hold on fundamentals - so if this is individual shares I will have considered the company's accounts and whatever I can glean about its likely future performance from its PR and market commentary and how that stacks up with the current price ; if this is actively managed funds or investment trusts it involves a consideration of what I like or dislike about their strategy, track record and the exposure they offer me to different underlying stocks and how that fits with the rest of my portfolio.

On that basis I am not looking to get an 'edge' from knowing that the S&P500's 20 day moving average line crossed the 50 or 200 day moving average and represents a tip that I should now immediately go out and buy or sell all the companies in that index in their relative weights in the index. To me that's not what hassle-free long term investing is about. So, I don't immediately need to buy a certain basket of shares at the market open or in real time.

That is not to say I don't consider the overall implied strength or weakness of an index in looking at my asset allocation or that I don't use index funds as a cheap and easy way to get broad exposure to a sector - I do. But as I'm not a trader I don't need to react to market indicators in real time. If I wanted to, I'd use ETFs. Or if I wanted to rely on a strategy where other people were using a lot of technical analysis to do the investing for me, I could buy into a hedge fund or other actively managed fund and just leave them to it, and take the eventual (hopefully) profits less the management fees for doing the work.

At this point I am wondering if it make sense to prefer european markets as long as they let you enter the market at a price which is as of noon of day T, instead of market close of day T

This is an example of where our objectives differ. I would not say I should not invest in US markets simply because I'm not local and my trading strategy would leave me at a disadvantage to other market participants based on some time lag.

Fundamentally, you can make a respectable long term return by investing in a market on day 1 and selling out of it on day 3650 or day 7000 and reinvesting 10-20 years of dividends back into that market or into another market, as well as trimming back your holding to rebalance your portfolio when markets are at relative highs to reinvest in lower markets, or topping up your holdings when they are relatively cheaper. This doesn't require you to buy at the bottom of the best of dips and exit at the top of every peak. Nobody is going to call it right every time.

The European markets might be growing at 5-10% a year slower than the US markets or Asian markets or whereever, over a certain period. So to propose that you would be better to restrict your investment strategy to European markets and ignore everything else out there, on the basis that you are going to be 5 trading hours closer to the action when deciding to buy or sell your broad index fund, just seems farcical.

If you are going to use a lot of TA to be an active trader in individual stocks or in indexes you need to use real time products like ETFs and shares and other instruments like bonds, preferably with direct market access - not "future priced" funds. It sounds like due to your job, you are prohibited from buying ETFs and shares and that therefore makes an active trading strategy very much less effective. Consequently you may find it better to adopt a more 'passive' approach.

I use the term passive, loosely, as in, sit back in your armchair and wait for the results rather than be at the coal face making constant investment decisions.

Whether that passive approach is simply buying an index fund with a 0.1% management fee and a 0.2% platform fee, and holding onto it... or whether it is researching an actively managed fund from an investment manager whose views echo your own and give exposure to markets or sectors that you hope will generally do well, with a 0.8% management fee, and holding on to it... or perhaps doing either of the above and revisiting one or two or four times a year - is up to you. But I would not restrict market choices to what markets give me data faster.

For example within my portfolio I have some investment trusts that invest in emerging markets or frontier markets or even developed markets in a mix of listed and unlisted equities. I can get the price of the trust at any moment of any working day and transact on it if I wanted. However, some of the underlying holdings would only be valued quarterly with the valuations released with a month or two's delay. The fact I am not at all close to real time in knowing what it is worth does not stop me from tripling my money on an underlying African infrastructure investment or a US venture capital deal that has been held for four years. So I am not going to stop investing in that asset class because of a delay in being able to react to signals.

talexuser

I'm with Fidelity for the long term and normally don't switch that often, only recently in the transfer in, and rebalancing between clean and bundled where charges were cheaper or neutral, did a lot of switching to get to where I wanted to be.

I put the online trade in a Monday, the units disappear on the Tuesday, and new units appear by Wednesday or Thursday depending on whether the order was placed in the morning. If you are effectively day trading, worrying about small overnight movements, you might be better off with shares and a different platform rather than funds?

the_learner

talexuser wrote: »

I'm with Fidelity for the long term and normally don't switch that often, only recently in the transfer in, and rebalancing between clean and bundled where charges were cheaper or neutral, did a lot of switching to get to where I wanted to be.

I put the online trade in a Monday, the units disappear on the Tuesday, and new units appear by Wednesday or Thursday depending on whether the order was placed in the morning. If you are effectively day trading, worrying about small overnight movements, you might be better off with shares and a different platform rather than funds?

Hi and thanks for this. Just to understand, units are sold at the price as of Monday? And new units are bought at thd price as of Tuesday?

talexuser

the_learner wrote: »

units are sold at the price as of Monday? And new units are bought at thd price as of Tuesday?

You got it