Unit Trusts Pricing

davethebb

I hope someone can confirm my understanding that unit trust pricing is directly based on the share value of its portfolio e.g. when the value of an individual stock it holds goes up the value of the unit trust goes up according to its weighted holding. If this is correct then do they buy and sell individual shares on a daily basis in line with the funds (cash) flowing into/out of the fund from the investors - I assume not so do they pool the money for a period of time and undertake it in blocks?

jimjames

Yes, unlike investment trusts that are traded a unit trust (commonly now OEIC) will be based on the value of investments owned. It would make no sense to buy 1 share in each company in the FTSE100 if someone invested £100 so yes the trades will be batched up.

Thrugelmir

Unit Trusts will always maintain a cash float of a decent sum. As on a daily basis there'll be purchases and sales. Direct fund costs to absorb along with the receipt of income due to the fund. Then there'll be an accrual for the fund managers fee to be considered. If the unit trust is say £500 million in size. A cash float of £50k is only 0.01% of the value of the fund. 

As the price is fixed daily. With the volume of sales and purchases known on advance. The fund manager can be prepared in making adjustments to the portfolio.

aroominyork

And there are other issues that mean the price might not perfectly reflect the underlying assets.

Some funds have a bid-offer spread, sometimes called a 'soft close' to discourage too much new money. Liontrust UK Smaller Companies has a 3% spread (as well as a hefty 1.37% management fee) but the amount in the fund keeps rising (it has doubled in the last few years) since people keep buying it.

Some funds use swing pricing so that the transaction cost of large purchases or sales is picked up by the purchaser or seller. Royal London Short Duration Credit does this, generally swinging the price 0.5%: see the spikes on the chart below. If you happen to buy on a day when a large client is selling (when the price is reduced), or sell on a day when someone is buying then you get a 0.5% bonus; but you lose 0.5% if you buy on someone else's buying day or sell on their selling day.

davethebb

Thank you all for your responses.

MarkCarnage

The manager of the collective fund generally operates a 'box' system, which is essentially a small working capital float of units to avoid excessive creation and cancellation. Combined with the pricing mechanisms outlined by @aroominyork above, that helps manage daily flows efficiently in most circumstances. There are regulatory rules around the system too.