Bid-ask-spread with regards to funds?

seismic99

I am familiar with the idea of the “Bid-Ask Spread” price with regards to regular shares, but why is it with some funds the bid and ask price is the same? Conversely, why is it with some funds that the difference between the bid and ask price is more significant?


As an example I was looking to invest in the recently launched HL Multi-Manager UK Growth fund. The bid-ask spread is currently: Buy: 102.74p, Sell: 99.66p. With such a difference between the buy/sell price does this make this fund more expensive than comparable funds with no difference between the buy/sell price and therefore to be avoided? Is the significant difference between buy and sell price effectively just another charge for holding the fund or I am I missing the point....???

bowlhead99

It's important to realise that with funds the quoted prices are the last prices, usually calculated daily - but when you want to buy in or sell out you'll do so at the next agreed price that they calculate. The prices only change once a day and unlike shares they are not quoted 'live' - so you are always buying or selling blind so you can't take advantage of a market movement after it already happened.

In practice there are costs associated with issuing new units but some funds are single priced instead of having a bid offer spread; in determining the price for a given day they may just tweak the net asset value by some factor depending on the level of buys and sells so the single official price that everyone gets to buy in or sell out at might be a little above or below the 'true' net asset value per share. As the price changes daily anyway you can't really see how much you or other investors are paying to join and leave.

Other funds do just have a slight difference between the official subscription/ buy price and the redemption/ sell price and quote two prices each day. Generally, Open Ended Investment Companies (OEICs) are single priced while Unit Trusts are dual priced with a spread, but there are exceptions to this.

In the old days, fund managers would charge a high initial fee to join the fund so that the buy price would be quite a bit higher than the sell price, and the fund manager would keep these entrance fees of 1%, 3%, 5% etc. Some adviser platforms or DIY platforms would be able to discount this initial fee away, maybe even down to nothing - the practice of discounting these charges has been going on for 15 years plus and in today's competitive market, pretty much nobody on any mainstream investment platform pays an initial charge for anything but the most niche specialist fund that can get away with having a real fee.

However, a number of funds do still have an 'official' initial fee even though you get it discounted. So when quoting the official bid-offer spread to all the platforms and price feed services, they include it and it looks like you are paying a big spread even though your platform of choice will discount it away.

If you look at that HL income and growth fund its factsheet says:
Initial charge: 3.00%
Initial saving from HL: 3.00%
HL dealing charge: Free
Net initial charge: 0.00%

So, there is no big initial fee buying this fund at HL, because they give you a 'saving' on the official fee. However, they'll inconveniently still quote the official bid-offer spread including this fee so instead of getting a tight spread on the price it shows that the gap is a little more than 3%.

Yes, even though this is an in-house fund that they constructed themselves, and you would only buy it from them rather than any independent platform, and they do not charge any initial fee to their platform customers, they still want to make it sound like you are getting a screaming bargain - so they create an arbitrary 3% entrance fee, publish official prices reflecting the fee, and then tell you you're getting an amazing 'HL saving on initial fee' for a net nil fee.

As a consequence, the real bid-offer spread to which you're exposed to is somewhat obscured, but basically with those figures about 3p of the spread will disappear and the true spread is pretty small.

As an aside, the cost of that fund is pretty high - paying 1.42% of OCF on top of platform fees of 0.45% is almost 2% total each and every year that the underlying funds would have to make for you to get any profit at all. That's the problem in using a fund of funds where you pay them to create a fund vehicle that charges you fees to provide access to the underlying funds they select, which also charge fees.

Sure, it's convenient and a "one-stop shop of our favourite UK equity funds", which "seeks to combine the best managers from across the UK All Companies, UK Equity Income and UK Smaller Companies sectors". But you could construct a portfolio of your own preferred mix of those favourite and heavily promoted UK equity funds, because that's what a DIY investment platform is for!

Obviously you would then have to take charge of deciding which funds to hold in which proportions but if you don't want to bother with deciding that, there are plenty of generalist UK funds that hold a mix of largecap, smallcap and income-focussed companies as part of an overall strategy. The HL fund of fund seems like an expensive option given it has only just launched and so has zero track record for you to compare against other more affordable options.

Rollinghome

Perhaps worth noting that despite the HL hard-sell urging punters to "invest at at the fixed launch price of £1" by the deadline, the price of that fund is now below the launch price.

No surprise there but underlines the fact that there's rarely any advantage, and more often many disadvantages, in investing in a UT/OEIC at launch. Unlike some share IPOs, UTs aren't launched at a discount.

I notice one of the latest HL wheezes is to label many funds: "Ongoing saving from HL, the saving we provide on the on-going charge". In most cases all it means is that the OCF for fund class offered may be slightly less than some other classes listed. They make the claim even when other platforms such a Fidelity, Bestinvest etc all offer exactly the same class at the same OCF. One of many examples is the newish Invesco Perpetual Global Targeted Return fund.

Over the HL coat of arms would be "Never give a sucker an even break".

sunnystart

I'm not really a fan of 'fund of funds' as the ongoing charges do appear to be a bit steep as bowlhead has mentioned. HL has listed the proposed portfolio line up as the following funds,

• AXA Framlington UK Select Opportunities - Nigel Thomas
• AXA Framlington UK Mid Cap - Chris St John
• BlackRock UK Special Situations - Richard Plackett
• CF Woodford Equity Income - Neil Woodford
• Jupiter UK Special Situations - Ben Whitmore
• Lindsell Train UK Equity - Michael Lindsell & Nick Train
• Majedie UK Equity - James de Uphaugh, Chris Field, Matthew Smith, Adam Parker & Richard Staveley
• Marlborough Multi Cap Income - Giles Hargreave & Siddarth Chand-Lall
• Marlborough Special Situations, UK Micro Cap Growth or Nano-Cap Growth - Giles Hargreave
• Old Mutual UK Smaller Companies Focus - Daniel Nickols
• Threadneedle UK Equity Alpha Income - Leigh Harrison

Don't think they have listed the percentage for each fund as yet.
One thing I have noticed since moving my investments away from the HL platform is that the minimum investment in most of the funds is a quite lowly £100, perhaps HL has missed a trick with this and their new 'fund' could easily be re-constructed by holding the individual funds and saving on double charging. I'm personally not too impressed with some of the funds selected, but they must have their reasons, (no devious thoughts intended).

masonic

I really don't understand why anyone would want exposure to all of those funds. Although they are not all investing in the same companies, there looks to be a lot of overlap. The investor is paying each manager a premium for carefully selecting a set of companies and weightings they believe will give their fund an edge (and each will be acting on different views), but by mixing up these strategies with those of others, the overall result must be that of chaos. Is the overall aim to achieve the average market return? If so, that could be done a lot cheaper.

TheBoffin

You need to watch out for "dilution levies" which are kind of the equivalent to a bid-offer spread for single-priced funds. (Unit trusts tend to be dual-priced and OEICs tend to be single priced, although this isn't always the case)

It's pretty hard to get hold of any quality data about dilution levies other than that fund manager often "retain the right" to apply them. The amount can vary from transaction to transaction, and I've seen it between zero and 1%.

However, I'm not aware of the amounts being published anywhere and have only ever seen actual numbers in transaction statements. I've actually taken this up with FinEx (the people behind Trustnet) but haven't gotten very far.