Blackrock UK Absolute Alpha

moneylover

I was thinking of investing in a stocks and shares ISA this year for first time and am considering the fund Blackrock Absolute Uk Alpha.

However I dont understand why the selling and buying price are so different as normally they seem to be the same with most funds. Is it something to do with the type of fund or is it that every financial page in every newspaper is jumping on the bandwagon that this fund seems to have become?

munk

The fund is a unit trust, so it has two prices associated with it - the bid and offer price. The bid price is the price you pay for new units and the offer price is the price you sell units at.

The difference between the two is the 'bid offer spread' and effectively amounts to the initial charge you pay when buying new units (since the bid price (what you buy at) is more than the offer price (what you sell at)).

For example if the bid price (the price you buy new units at) is 105p and the offer price (the price you sell units at) is 100p then the bid offer spread is 5p which is 5% - you're effectively paying a 5% charge to buy into the fund.

Look at it another way - imagine you bought a single unit in the fund - you'd have paid 105p. Now imagine you sold it straight away at 100p - you'd be 5% less well off... the 5% represents the initial charge for buying the unit.

The bid offer spread can usually be discounted away if you use a discount broker like Hargreaves Lansdown. On their site if you look up the fund you'll see that their initial charge discount on that fund is 5%, so your initial charge is actually 0% (although there are other charges incurred which on that fund amount to about 0.25%).

Have a search for 'hargreaves lansdown' on here, they're mentioned quite often.

As for the quality of the fund, I'd recommend it highly. It's weathered the last 6 months of financial storm with very low volatility but at the same time managed to increase in value steadily. It's not been fully tested in all market conditions since it's still a relative newcomer (1-2yrs old or so?), but over the last 6 months it's done very well to beat off the storms.

meester

The fund is a Unit Trust. These include the commission for financial advisers in their advertised sell price. If you buy from a discount broker, you will not actually pay this cost.

Most funds nowadays are OEICs. These have one price and the commission is added on top of that price when you buy.

The effect is exactly the same.

If you are buying the fund from a broker that discounts some of the initial commission, then you need to take that discount off the price to work out the actual selling cost.

E.g.

http://www.h-l.co.uk/fund_research/security_details/sedol/B11V7T6.hl

Sell: 116.2p
Buy 122.3p (INCLUDING THE INITIAL CHARGE/COMMISSION)
Initial charge: 5%
Initial Saving 5%
Fund Type: Unit Trust

This tells you that it is a unit trust, so the buy price quoted includes an initial charge of 5%. To find the actual buy price you take off the initial saving (of 5% in this case).

Hence 122.3p * 0.95 = 116.2p

So the buy/sell is the same.

Compare with:

http://www.h-l.co.uk/fund_research/security_details/sedol/B29TR99.hl

Sell/buy: 101.2p
Initial charge: 3.5%
Intial saving: 3%
Fund type: OEIC

In this case, the fund type is OEIC so the initial charge is ADDED to the price.

To find the price including charge, you need to consider that 3.5% is the charge out of the amount invested, not the cost of the fund. Hence the cost is not 1.035 * 101.2 = 104.7p, but 101.2 / 0.965 = 104.9p.

They are discounting 3% of this, so the actual price paid is 101.2/0.965*0.97=101.72p.

It's safe to treat a 3% saving on a 3.5% charge fund as a real 0.5% charge, but it is worth being aware that it is in reality actually 0.52%


Your post, btw, is the reason most funds now follow the single price OEIC approach - it's much less off-putting to investors. The managers make more money by attracting new investment, and a bid/offer spread puts people (like you) off sending them their money. The Unit Trust, as you can see, need not cost any more, it just looks like it does.

I would guess that a very small fraction of fund investors actually realise that they are not paying the quoted sell price when they buy from their discount broker.

turbobob

If it was an OEIC (open ended investment company) instead of a unit trust they have one price. However there are still initial charges on OEICs. Some former unit trusts have now converted to OEICs.

moneylover

Thank you all for such comprehensive replies, obviously late at night is the time to post! Am now going to ask another question and then go to bed!

nicko33

munk wrote: »

As for the quality of the fund, I'd recommend it highly. It's weathered the last 6 months of financial storm with very low volatility but at the same time managed to increase in value steadily. It's not been fully tested in all market conditions since it's still a relative newcomer (1-2yrs old or so?), but over the last 6 months it's done very well to beat off the storms.

How long has it been holding 80% cash ?

munk

That's a good question, to be honest I have no idea - the best way of checking I can think of is looking at the portfolio history for the fund on trustnet:

http://www.trustnet.com/ut/funds/port.asp?fund=5930

Although that only lists the top 10 holdings... but at least it gives you an idea of the minimum non-cash asset allocation in the fund over time. Looks as though it's always been that no more than 20% of the total fund has been invested in the top 10 listings for the fund for the period the trustnet breakdowns cover - ie naked long positions. The rest will probably be allocated for short trading to offset long positions (pair trading) or for naked short positions (positions taken on a hunch a stock will fall).

The fund does have the remit to invest up to 100% in cash. I imagine the reason for the high cash levels are so the fund can make it's specialized trades (synthetic shorting) at short notice, keeping the fund nimble.

Just curious where did you see the 80% figure for cash - was it on HL's site? That's the only place I see a round figure of 80% mentioned - I can't even see any info about the amount in cash even on Blackrock's own site.

meester

nicko33 wrote: »

How long has it been holding 80% cash ?

That cash is probably margin on derivatives. Essentially cash generates a low return and also provides collateral against the fund's bets going the wrong way. It may actually INCLUDE derivatives.

nicko33

munk wrote: »

Just curious where did you see the 80% figure for cash - was it on HL's site?

yes, well it says 79%, and I rounded

meester wrote:

That cash is probably margin on derivatives. Essentially cash generates a low return and also provides collateral against the fund's bets going the wrong way. It may actually INCLUDE derivatives.

ah. Thanks.

purch

That cash is probably margin on derivatives

...bl**dy hell....that's a lot of Margin :eek:

They must be leveraged up to the eyeballs :eek:

meester

purch wrote: »

...bl**dy hell....that's a lot of Margin :eek:

They must be leveraged up to the eyeballs :eek:

Well not really.

If you make a bet that goes against you, and you have a £10 margin call you'd rather have £10,000 to cover it than only £10!