Timing buying & selling funds RE: 'FORWARD PRICING'

[Deleted User]

Hi.

Can anyone please give some hints/tips re "forward pricing", when buying and selling funds...?

I have a vantage isa with Hargreaves Lansdown, and I'm never really sure when to pounce if you know what I mean! For instance, the stock market rallies, and you think, right, I'll lock in some profit on a fund, and sell.. At what stage does this general rise in share prices get reflected in the fund price?

If the stockmarkets rallied big time in the morning for instance (and you thought that your fund would benefit), and you placed a sell order that same morning, would you get the following days 12.00pm price, AND more importantly, would that following days price reflect the previous mornings price rises..?? Or, would that mornings price rises be reflected in the 12.00pm price on that same day?? I get the feeling there's quite a delay?

I hope this makes sense, and that someone can explain this system for me.

Many thanks in advance Moneysavers.

Browntrout_2

Forward Pricing is is unknown, you really are guessing so the only rule would be sell into a generally rising market and buy in generally falling market. You cannot time it like real time individual shares.

Remember that the basis for calculating offer and bid prices on unit trusts is the net asset value of the trust's assets, and that the NAV is calculated once a day.

Suppose, for the sake of argument, that the valuation point is 12pm. For someone trading exactly at 12pm, a price based on that NAV would be 100% fair and accurate.

But what about someone trading at 4pm in the afternoon, when the actual NAV may have risen or fallen away from the NAV at the 12pm calculation point. Should pricing still be based on the out of date NAV?

Unfortunately, unit trust NAVs are not recalculated in real-time, so pricing has to depend on a NAV at one fixed point in time. Since 1 July 1988, fund managers have had a choice about which point in time they pick - the last one or the next one:

1. Historic pricing
   • Historic pricing entails basing prices on NAV calculated at the last valuation point.
   • The advantage is that buyers know exactly how many units they are going to get for their investment and sellers know exactly how much money they will get for their units.
   • Managers are open to the risk that the trust's assets may increase between the valuation and dealing points, in which case the units will be underpriced.
2. Forward pricing
3. • Forward pricing, which is the norm, entails basing prices on NAV calculated at the next valuation point. So someone buying units at 4pm in a trust which uses a 12pm valuation point, will buy on the basis of a price calculated on the next day's 12pm valuation.
   • The disadvantage is that buyers do not know how many units they will get for their money, and sellers do not know how much money they will get for their units, until after the next valuation point. To an extent they are buying and selling 'blind'.
   • The managers like it, of course, because there is no risk of mispricing.

In circumstances where there is large imbalance between the number of units being bought and the number sold, the managers may decide to adjust prices towards the FSA limits.
Imagine that the number of investors selling is far greater than the number buying, such that the managers are net buyers of units in the trust.

• To some extent they can absorb the imbalance by accumulating units in a 'manager's box' where they are held for future purchasers.
• If the selling is very heavy, however, they may actually have to liquidate units. To protect the fund against the costs involved, they may decide to move the bid price in the direction of the cancellation price (i.e. make it lower).

Now imagine the opposite situation where the number of people buying units is much higher than the number selling. The managers are net sellers of units.

• They may be able to meet some of the excess demand from units held in the 'manager's box'.
• If buying is very heavy, they will have to create new units to meet demand. In these circumstances, they may decide to raise the offer price towards the creation price to cover the full cost of creating units.

When the managers reduce the bid price all the way to the cancellation price the trust is said to be priced on the full bid basis. If they raise the offer price all the way to the creation price the trust is said to be priced on the full offer basis.

[Deleted User]

It makes you wonder why funds/trusts are so popular, when you don't really know how much you'll pay or make?! I guess forward pricing is here to stay, but it would be nice if the buying/selling system was simplified, and made more transparent, so that you know in advance roughly what you'll be buying or selling at.

Aegis

They used to be priced differently, and it was a disaster in the end, from what I've read on the subject. The reason it works is because funds aren't short-term investments, they're designed to be bought and held for 5+ years. As such,t he day-to-day fluctuations should matter very little in the long run, and the average investor really isn't going to worry too much about a few lost pounds here and there if the long term growth is measured in thousands.

[Deleted User]

Aegis wrote: »

They used to be priced differently, and it was a disaster in the end, from what I've read on the subject. The reason it works is because funds aren't short-term investments, they're designed to be bought and held for 5+ years. As such,t he day-to-day fluctuations should matter very little in the long run, and the average investor really isn't going to worry too much about a few lost pounds here and there if the long term growth is measured in thousands.

Fair comment; and I know you're right. I am probably better suited to buying and selling individual shares perhaps! Thanks for your input:money:

King_Weasel

OK, so investment funds aren't suitable for day trading. But right now the stock market is fluctuating wildly and the day-to-day timing of transactions can make quite a difference. So why is it not possible to make buy and sell actions in funds conditional on price ie "Please sell £a-worth of units if the price is at least £b" OR "Please buy £c-worth of units if the price is no higher than £d."

I have just bought a few shares directly and am looking to pounce again. I would have preferred to have invested in a unit trust but can't risk it in the present climate.

RayWolfe

Accepted but ... with H-L at least you can order before 8 o'clock in the morning and the deal will be done at the next pricing point which will be from 2 to 4 hours away. (By 8 you will know how NY and the far east closed.)
In normal markets this is more than adequate.

jon3001

If you want to trade in real time then maybe an ETF would be suitable? You buy and sell then on the stock exchange.

These seem to be the main providers:
http://www.ishares.co.uk
http://www.dbxtrackers.co.uk
http://www.lyxoretf.co.uk