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Up down, down up – what’s happening here?

aroominyork
Posts: 3,157 Forumite


Below is a snapshot of Royal London Short Duration Credit
over the last three months. There are various days when it has moved either up
or down by about 0.5% then reversed the move the next day. Curious. What is
going on?

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Comments
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Effects of underlying investment valuations aside, if it's just the occasional half percent spike up or down on odd days here and there it is likely that you're just seeing the effect of swing pricing as the fund manager handles large subscription or redemption requests and applies a dilution adjustment to the underlying NAV to insulate the rest of the investors in the fund from the costs associated with administering the requests and liquidating assets or deploying new money.
Per prospectusWhere a Fund is experiencing net acquisitions of its Shares the dilution adjustment would increase the price of Shares above their mid-market value.Where a Fund is experiencing net redemptions the dilution adjustment would decrease the price of Shares to below their mid-market value.It is the ACD’s policy to reserve the right to impose a dilution adjustment on purchases, sales and Switches of Shares of whatever size and whenever made. In the event that a dilution adjustment is made it will be applied to all transactions in the relevant measurement period and all transactions during the relevant measurement period will be dealt on the same price inclusive of the dilution adjustmentI don't know enough about the composition of the fund to comment on whether there were particular market events affecting the portfolio holdings at those times, but the above is pretty standard. It is not as visible on an equity fund (or a more volatile credit fund) because the random daily movement can easily be half a percent to two percent anyway. But you may see it stand out a bit more on a short duration credit fund where the issuers are mostly the low end of investment grade rather than junk and UK rather than foreign and the duration is short rather than long, because such funds tend to have more stable NAVs.
If you don't care to see the individual little bobbles of pricing just zoom out to a multi year view where the price data is coming weekly or monthly, and they will largely disappear
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Thanks. So are you saying that if the NAV/price of the fund is 100p and a client wants to make a big purchase, RL artificially increases the price to 100.5p on the day of purchase so the buyer pays 0.5p per unit to cover RL's costs of acquiring the additional units, thus avoiding the cost falling onto the shoulders of existing holders? And if you are a small investor buying on that day - well, tough?
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aroominyork said:Thanks. So are you saying that if the NAV/price of the fund is 100p and a client wants to make a big purchase, RL artificially increases the price to 100.5p on the day of purchase so the buyer pays 0.5p per unit to cover RL's costs of acquiring the additional units, thus avoiding the cost falling onto the shoulders of existing holders? And if you are a small investor buying on that day - well, tough?
Likewise on a different day if there were a large volume of orders from exiting investors they might drop the price to 99.5p, and if you were cashing in a hundred shares within the fifty million shares being redeemed you will get the 99.5p price just like the person who was redeeming 49.999 million.
If there's 100 million joiners and 99 million leavers they may not bother to swing the price at all because they are only net buying or selling a million shares and they have adequate cash on hand to do that anyway, but if over the course of a week the net movements are significant one direction or another they may just arbitrarily decide they need to recoup some of the distortion by applying a dilution adjustment to Friday's price so that existing holders don't suffer the impact of the joiners and leavers.
An alternative is to have a quoted bid-offer price so there is always a margin made for the benefit of the fund - or a permanent fixed dilution levy charged to joiners. For example when Vanguard were rapidly growing some of their index funds with high UK equity exposure and getting net subscriptions from new investor money, they used to charge a 0.x% levy on all subscriptions. The concept being that if you put £100 into the fund then even without brokerage costs it would cost them £100.50 to deploy that into UK equities because of stamp duty. While they would not need to deploy all £100 (because of £50 of leavers going the opposite direction at the same time), there was likely to be an overall loss of value as a consequence of buying £49.75 of equities for £50 including stamp duty and them immediately being 'worth' only £49.75 at end of day. So they published a fixed levy which was applied to the day's unit price and charged it to people separately via their contract notes for the benefit of the fund as a whole.
Different funds will approach the 'problem' of cost of subscriptions and redemptions in different ways but a general ability to 'swing' the price to something akin to a bid basis or offer basis as you go along - despite only publishing one price per day which all joiners and leavers will get for that given day - is reasonably standard for an OEIC which only has a single published price.1 -
Currency fluctuations?0
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Thrugelmir said:Currency fluctuations?
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Underlying values are going to change, though not neccessarily on a daily basis as many Corporate bonds are highly illiquid.0
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Thrugelmir said:Underlying values are going to change, though not neccessarily on a daily basis as many Corporate bonds are highly illiquid.
For example, below are some of my direct holdings of pref shares and today's published spreads on LSE, which are huge. They are prefs not bonds but similar 'fixed income' concept. With the exception of REA and BP, they are reasonable sized issues of £100m+ so not implausible for a billion pound fixed income fund to be buying this sort of thing if it has a broad 300-strong portfolio (although not the particular fund in this thread, because of its target of short duration issues). My own purchases would only be a few thousand pounds each so I would often get well within the spread, but that's not going to be the case for someone who wants to add a few tens or hundreds of thousands of pounds as new investor money comes in.LLPC 142-146 Lloyds Banking Group 9.25%RAVP 116-123 Raven Property 9%NWBD 147.5-153.5 Nat West 9.25%ELLA 151-159 Ecclesiastical Insurance 8.825%
STAC 125.8-132.7 Standard Chartered 8.25%BP.A 160-168 BP 8% cumulativeRE.B 59-63 REA Holdings 9% cumulative0 -
bowlhead99 said:My own purchases would only be a few thousand pounds each so I would often get well within the spread, but that's not going to be the case for someone who wants to add a few tens or hundreds of thousands of pounds as new investor money comes in.
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aroominyork said:bowlhead99 said:My own purchases would only be a few thousand pounds each so I would often get well within the spread, but that's not going to be the case for someone who wants to add a few tens or hundreds of thousands of pounds as new investor money comes in.
No, the spread is increased, not reduced if you are trying to get a quote for a larger sized transaction relative to the amounts that usually trade in the markets.
If the market is very liquid (i.e. lots of buyers and sellers) then the spreads are thin. For example Unilever at 4,718.00 / 4,720.00 to sell or buy, Lloyds ordinary shares at 28.78 / 28.78 (you would need to get into more decimals to be able to drive a wedge between the buy and sell price). There are so many people willing to buy or sell, if you had bought ULVR at 4718 you couldn't then immediately sell it at 4721 because other people who had just bought it at 4718 would be happy to sell it at 4720 and get the sale instead of you and make a small amount of profit - lots of supply and lots of demand means tight spreads, the difference in pricing is less than a twentieth of a percent for Unilever for trades at a normal size for that market
With a less popular stock such as Dignity the price is 248.50 / 252.00 which is about 1.4% between buying and selling, as there are simply fewer people buying and selling making the market less efficient / less competitive so people don't need to offer you a sell price so close to the buy price or vice versa. Unilever is worth 120 billion rather than 120 million and so it's clear that if you wanted to shift £1k worth of stock it would be easier to do that efficiently with Unilever.
So a large size of the market for a share can lead to a lower spread, and mean that the average size of a trade in the market is relatively larger (because a meaningful ownership stake simply costs more money, and institutional investors will be willing to invest larger sums in such companies because they can do so efficiently)... but that doesn't mean a larger transaction in relation to the given market will get a lower spread - in fact it's the opposite. If you have a trade that you want to place which is larger than the average size for the market that's being made in that stock, you may end up paying more to buy, or getting less to sell..
Consider what happens if I want to do a larger transaction:
The market maker's offer price for Dignity means that the most I should have to pay for a transaction of a normal size in the context of the daily market for Dignity shares is 252p and the bid price means there is someone willing to bid 248.5p to buy a relatively normal amount. But if I wanted to invest a million pounds into the company (getting on for a percent of the entire company), that would be 400k shares, more than twice the amount of shares that changes hands on an average day.
Sure, someone would let me buy the first thousand shares at 252p. But if I want another thousand and another thousand and another thousand and another thousand... all at once, the person who was willing to accept only 252p for his shares has already got rid of his shares and the next person willing to sell shares may not be willing to accept as little as 252p for them. If I have a huge order and want hundreds of thousands of shares and there aren't enough people in the market wanting to sell, those who are wanting to sell will demand more money for them. If I need to buy 400k shares in a hurry, maybe I would need to pay 255p, because the act of me wading in with a huge order has caused people to reevaluate how little money they would accept for the shares, and ask more.
Or, imagine if I am trying to sell a huge chunk of stock. I see I am offered 248.5p for a normal amount of shares. However, I want to dump hundreds of thousands of shares onto the market. Unless I drip them through quietly in small amounts, trying not to get noticed, I am not going to get away with people paying me 248.5p for all of them. Unless I can negotiate off-market with a big institutional investor who is really keen to buy a large stake (which he would have had to pay a high price for on the open market), I am just going to have to accept that only a few people would want to buy my shares at a 'normal' price, because a huge order to sell my shares does not give people confidence to offer lots of money for them. They will assume that if they, like some kind of idiot, buy them for 248.5p then soon the market will run out of buyers and the seller will simply have to ask less for them at some point. So, why bid 248.5p to buy some of my shares when we're going to run out of buyers and I will be forced to accept a lower price to get rid of the rest of them by tempting more people into the market? So maybe I can't sell the 400k shares for 248.5p at all, maybe it would be 245p.
As a consequence, in practice the bid-offer spreads for a large transaction relative to the normal daily volumes going through the market for that particular share or bond, will be wider (e.g. 245p-255p in the example, 4%) than if we were just doing a little trade within the broker's usual expectations (248.5-252p published spread).
It might be that if I only wanted a few hundred shares (not very meaningful in the context of usual daily volumes) I would be able to place a trade to buy or sell well within the published limit. Because although the market maker quote for an order of normal market size was an offer of 252p, there might be someone with just a few shares to shift who would happily take 251p or 250p for them, he just wants to get rid, but the london stock exchange can't publish that the buying price is 'only' 251p because anyone wanting to sell a normal amount of shares (in the context of average daily volumes) would have to pay 252p, because only a few hundred are available at 251p.
So a small trade can take place within the spread (i.e. lower practical spread if you are not trying to disrupt the market very much and there happens to be enough available at a good price to get your trade away) and a large trade may need to take place at wider spreads.
As an example, LLPC mentioned in my previous post currently has an indicative spread of 142-147p (a bit wider than the 142-146p that I posted the other day), but in practice I could get a firm quote from my broker right now to buy one share for only 144.2p (actually lower than the 'mid-price') while I could sell 5000 shares for 142.5p (a bit more than the published bid), although if I wanted to sell 15000 shares I would only get a quote of 142.33p, a bit worse than if I were trying to only sell 5000. So with these small trades, I am getting comfortably within the published spread, but if I was an investment fund with a billion to deploy and wanted to buy 500,000 more shares to top up a holding, I would not be getting them for the same price as the person who just wants one share, even though I can see someone on the market with one share available for 144.2p.
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So the short the answer is "No". (But luckily you aren't one for the short answer because it's from your long answers that we learn.) And it makes complete sense and is the same logic as why, at the beginning of this thread, you explained how swing pricing is used when buying or selling large quantities of OEICs.PS Or, on Betfair Exchange, the larger the bet the shorter the odds. So if I want to back Chelsea to win the FA Cup on Saturday I can currently get odds of 2.28 for the first £642 I bet, then only 2.26 for the next £998, and 2.24 for the next £245. The more I want to bet the fewer keen punters (who think Arsenal will win) there are to take my bet, so I have to accept shorter odds.1
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