H&L "Creation fees" when fund switching

jamesd

wombat42, thanks. The term to use isn't "creation fees" but "creation price". You're correct that for unit trusts even where the initial saving is equal to the initial charge you can lose some money when you switch into or buy.

Raywolfe in post 16 and jimatko in post 18 were correct about what is happening: the extra spread is the difference between the bid price on offer basis and the creation price. I explained it in more detail in a post about property funds and I suggest reading that now. Here's the summary from the end:

Cancellation price, same as bid price on bid basis.
Bid price, on offer basis (the price usually shown as "sell" at HL)
Creation price (cost of shares+stamp duty+manager's broker fees)
+ initial charge = full offer price (price usually shown as "buy" at HL)

Lets consider a market where there are more buyers than sellers. When a unit is purchased the unit trust manager has to buy the shares and pay the stamp duty plus the fees of their broker. Stamp duty is 0.5% so that's about the lowest the difference can be unless there are some shares that haven't yet been used to build units or some unit redemptions available to reduce the number of shares that must be purchased.

At the Artemis site the Friday price for Artemis Global Growth was Bid 131.75 Offer 139.29, exactly the same as given by HL. The offer price is 5.723% higher than the bid price. I'll assume that the bid the pricing is on offer basis. The normal initial charge is 5.25% for this fund. So we have 5.723 - 5.25 = 0.473% difference. 0.473% is lower than the 0.5% for stamp duty so that suggests that there were a few units being sold back to Artemis so they didn't have to create every unit they were selling.

Now, one point here is that this is the pricing from Artemis, not Hargreaves Lansdown: Artemis is doing this, not HL. And every place you buy those Artemis units from will be getting the same price from Artemis.

For your transaction the difference was 0.67%, not 0.473%, which suggests that at that time you were paying the full cost of creating the units, presumably because there were few being sold back to Artemis.

The pricing for Artemis Global Growth was really on bid basis on Friday, meaning that there were more sellers than buyers and both the bid and offer prices had been reduced accordingly. Buyers would have dodged paying the extra bit of money for the creation of some units but that wouldn't be visible until the fund switched back to offer basis because valuations would show the bid price on bid basis instead of the usual offer basis.

Why doesn't HL mention this? Everyone does it so they probably assumed everyone knows about it. And HL can't know in advance if pricing for the next day's valuation point will be on bid or offer basis and what the extra cost is going to be because Artemis themselves don't know either.

This doesn't apply to OEICs, which use shifts in their single value to handle the creation costs. You still pay, you just can't see it in the price on the same day.