Rounding when buying funds help

ronbridges17 · 26 June 2019 at 7:50AM

I have a question regarding be disadvantaged by rounding when buying fractions of shares in small amounts.

I have a plan to transfer funds to the Vanguard platform for my Kids Jnr ISA's (from another higher cost provider). I would then look to make small contributions each month of ~£25 (I have 3 kids so this is 3x this amount as it's £25 per kid going into their individual accounts).

My plan is to invest in one of the LifeStrategy funds (80 or 100).

I phoned Vanguard to make sure I could do this lump sum transfer and small monthly contributions thereafter. They said that I could but that because of the way they lump together buys at their end and the small amount (£25) I'd be disadvantaged by rounding in the fractions of the buys and that I'd be better off doing £100 contributions.

£100 per kid per month is not an option (£300 in total).

So my question is, how big a disadvantage would buying £25 actually be? Should I just do the automated payments (and take the hit) or should I hold off until I have £100 locally and do buys then (but this would be manual and I'd be prone to forget)?

Any help in this question would be much appreciated, I feel that the upside of moving to a low-cost provider and not doing manual work on this investment could be a lot better than the small downside of rounding issues (but I want to quantify what the rounding downside really is).

Many thanks
Ron

Tom99 · 26 June 2019 at 8:26AM

Not sure how Vanguard round but I invest relatively small dividend sums in one of Vanguard funds via Halifax.
The number of units you get is rounded to 4 decimal places.
So for example £25 in VLS80 at 20,819.50p would get you 0.1201 units.
You can therefore win or lose up to 0.00005 units in the rounding which is about 1p

ColdIron · 26 June 2019 at 8:29AM

I wonder if there has been some misunderstanding between shares in Vanguard ETFs, which must be whole numbers, and units in funds which are divisible to many decimal places

Zero_Sum · 26 June 2019 at 8:41AM

It depends what youre buying.
VLS you're ok as its rounded to 4dp. Some of Vanguards other funds like emerging markets are rounded to 1 or 2 dp so best avoiding if buying in small values.

I make regular deposits in VLS & similar funds for small amounts, and occasionally may lose the odd penny here & there. Its nothing to worry about.

ronbridges17 · 26 June 2019 at 11:10AM

Thanks for the replies!!

I think you're right regarding my confusion between the different types of funds and I can remember the customer advisor from Vanguard saying something about it depending on what I buy.

Given that I want to buy VLS how will I find out how the Vanguard platform will treat a £25 buy, is it a universal 4dp? I guess I should phone them back and confirm.

Sounds like it's a penny here or there which is no big deal at all and i can fire on with my plan

ronbridges17 · 26 June 2019 at 12:16PM

Ok, so I phoned Vanguard and got through to someone who was very helpful indeed.

He look me through an explain showing how there is a higher risk of rounding on smaller amounts as follows:

Example shows a Loss of 3.2% on £25 investment
Invest: £25
Unit cost: £220
Units in Fund: (25/220) = 0.1136 (4DP)
Units after aggregation: = 0.11 (2DP)
Actual Investment : (0.11x220) = £24.20
Round Difference: 80p loss
Round Difference as % : (0.8/25) 3.2% loss

Example shows a Loss of 1% on £100 investment
Invest: £100
Unit cost: £220
Units in Fund: (100/220) = 0.4545 (4DP)
Units after aggregation: = 0.45 (2DP)
Actual Investment : (0.45x220) = £99.00
Round Difference: £1 loss
Round Difference as % : (1/100) 1% loss

* The aggregation rounding is when the buys are pooled together of everyone buying at that time before they are relocated back out (done to keep costs low)

Of course, there will be occasions when rounding goes in your favour, but the point is that the higher amount can absorb the loss better.

getmore4less · 26 June 2019 at 1:50PM

Can't they just carry the unused cash over like companies do with DRIP programs.

ronbridges17 · 26 June 2019 at 3:42PM

Thanks for correcting. Copy and paste error 😂🤦!♂️👍

bowlhead99 · 26 June 2019 at 6:59PM

getmore4less wrote: »

Can't they just carry the unused cash over like companies do with DRIP programs.

It seems like the way they run it, there isn't any unused cash - because the total amount of cash available from their customers is simply used to buy as many shares as it will buy in total, and then that total amount of shares bought for the customers is shared between those customers using a less granular level of rounding (only 2 decimals) which means you might win or lose 0.0050 of a share.

On a £200 share price, that's up to a pound either direction, depending on if you're lucky or unlucky, and nearly all people will be less than that (ie rounding effect of 0.0001 to 0.0049).

You would expect this to even out over time, so I wouldn't be too concerned on a long term savings scheme because as the person mentioned there will be times when it's in your favour, but yes it's a bigger variance to win or lose up to £1 on £25 contribution than on £100 or £1000.

If buying ETFs - where you can't buy a partial unit at all - it's messy with small contributions as you'll probably fail to buy units for several months straight as your account balance builds. I wouldn't be too worried when buying funds. Although to be honest I probably wouldn't bother at £25pm, simply save the money until I have £500-750 and then do a contribution for the kids once a quarter or something. Maybe monthly is convenient for direct debit if they only offer monthly rather than quarterly.

ronbridges17 · 27 June 2019 at 7:47AM

Thanks everyone for your comments so far! I feel a lot more informed to make a decision now.

Rounding when buying funds help

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