Funds bid/offer spread

caliston

Something I don't understand... some funds have bid/offer prices quoted and some don't. Let's take two randomly selected examples:

Standard Life UK Smaller Cos R Acc
NAV    GBP 2.31
Initial charge	4%
Annual management charge	1.5%

Schroder UK Smaller Companies Acc
Bid	GBP 15.19
Offer 	GBP 16.49
Initial charge	5.25%
Annual management charge	1.5%

I'm not commenting on the performance of the funds because they're picked completely at random. But it looks like the bid/offer spread adds an extra 8.5% onto the initial charges of the Schroder fund. That's huge! Surely that's going to be a big load on the returns? Most funds seem to have a spread of about 6% if they have one at all. And that's on top of the initial charge which you would pay if you didn't go to a discount broker.

If there a way to avoid bid/offer spreads other than choosing funds which don't have them? Do funds which don't have them extract charges in other ways?

dunstonh

Unit trusts have bid/offer spreads but OEICs are single priced. The initial charge is not on top of the spread.

caliston

OK, I'd understood it was a difference between UTs and OEICs. But what role does the spread have to play then, if it's not an extra charge? Is it absorbed into the other charges in some way?

munk

Yes I thought the spread represented the initial charge - ie you buy at a lower price than you sell for and the difference between them represents the initial charge.

This item on the investor academy goes into this (as well as discussing 'creation pricing' - edit: mmm, creation pricing was mentioned on some other thread, sorry thought it was this thread!), though I'm still confused a bit re dual structure pricing/bidoffer spread/ic:

http://www.incademy.com/courses/Unit-trusts-and-OEICs/Pricing-of-units---FSA-rules-on-maximum-offer-price/6/1007/10002

dipsomaniac

single pricing is supposed to be more transparent - you have one price and then the initial charge is added. You don't see the bid/offer spread of the underly assets you are buying/selling.

if the two funds mentioned above held identical underlying assets and had equal buyers and sellers you would still pay the same to invest and receive the same proceeds when cashing in your investment as the net asset values of the funds would be the same. any different and existing/remaining unit holders would lose out/gain.

One of the reasons that the spread is so big on the fund you can see is that the underlying assets (smaller cos shares) have larger bid/offer spreads than larger cap companies. The basis on which they are priced in the example is almost certainly on a cancellation basis which will also widen the spread as the fund will have more sellers than buyers resulting in the fund manager having to cancel units at the lowest price possible.

with an initial charge of 5.25% the bid/offer spread could be anywhere between 5.5% (equity fund) and 10% (as seen with property funds recently) depending on the spread of the underlying assets and the basis the fund is priced on.

caliston

So if I bought the Schroder fund at full price and then sold it again five minutes later, how much would I lose? 5.25% initial charge, anything else? If the initial charge was discounted to zero, would I lose anything at all?

dipsomaniac

unit trust and oeics are not the best vehicles for day trading due to the charges involved and the (possible) restrictions on switching. although you can make money on some of the US funds if you have enough free switches.

if you placed both buy/sell trades at the same time in the schroder fund and received the above prices you would lose 8% if you paid full initial charge and 3% if the initial charge was discounted completely.

caliston

Thanks. So what's the point of quoting the initial charge if it doesn't actually control how much you pay?

(I realise there's no point in day trading, but it was just an example to avoid worrying about price fluctuations)