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Beware pricing 'tricks' when buying Unit Trusts
cepheus
Posts: 20,053 Forumite
A few weeks ago I purchased a unit trust AXA Framlington Managed Income Acc and a number of Oeics a few days later. I think its the first time I have bought a unit trust. I noticed my profit was about 5% down despite obtaining the full 5.25% discount and the price increasing. At first I thought they had forgot to allow for the discount, but a few days later after my broker Hargreaves Lansdowne contacted the management group, I received this explanation
This is rather annoying since I enquired about pricing and this very possibility back in July
An expensive mistake indeed. Imagine what would have happened without the discount they might charge 11-12% overall!
Usually the offer price is calculated by adding the initial charge to the creation price. As the creation price is the lowest price to buy units, the maximum discount that can be applied is the full initial charge. This is known as a valuation on an offer basis. The normal initial charge on this fund is 5.25% and we are able to discount the initial charge by 5.25% so the units would just be purchased at the creation price.
However, the other way that the Unit Trust Manager can calculate the bid and offer prices is known as a valuation on a bid basis. Trusts will be usually valued on a bid basis when a higher proportion of units are being sold than bought. The manager is effectively sliding the bid/offer spread downwards towards the bottom of the permitted range. The creation price does not move with the bid and offer prices, and as a result the gap between the offer and creation prices will narrow. This is the way the units were valued for your purchase on the 14th October.
Typically when a fund is being valued on an ‘offer basis’, the creation price is around 1 or 2% higher than the bid price. However, when a fund is being valued on a bid basis, as in your situation, the fund manager slides the creation price much closer to the offer price which happened in this case.
This is rather annoying since I enquired about pricing and this very possibility back in July
As we are able to offer you a 5.25% saving, on the 5.25% initial charge of AXA Framlington Managed Income fund, you would pay no initial charge and therefore would not purchase the fund at the quoted buy price but at the creation price which significantly reduces the spread.
Using the example of the AXA Framlington Managed Income fund, income units and yesterday’s quoted price of 192.50p to sell and 204.80p to buy, taking into consideration the full discount we offer on the initial charge you would have purchased the fund at the creation price of 194.45p. [about 1%] As a result the bid offer spread is greatly reduced.
An expensive mistake indeed. Imagine what would have happened without the discount they might charge 11-12% overall!
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There are some UT managers who completely take the p1ss when it comes to Creation Prices. AXA Framlington are one of them ... but, it's very difficult to know what will be added before you buy. H-R wash their hands of it - because, I guess, they have as much control as we do; none! But AXA do too. They come out with bland, all encompassing statement like, "This fund (every fund) has some elements which are less marketable than others". Some fund managers charge a buying/selling premium (dilution?) like Troy 0.5% but at least you know about it before you proceed.
I am rapidly coming to the conclusion that with the above sorts of tricks and an ever increasing AMC, that this industry stinks as much as banking does.0 -
This is not a trick. The fund is soft closed and has been for a while. So, they effectively double the spread to put people off.
You may wish to query this with HL if they have misrepresented the charges of the fund.An expensive mistake indeed. Imagine what would have happened without the discount they might charge 11-12% overall!
You wouldnt have been put in it. So, would never have been charged it.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
This is not a trick. The fund is soft closed and has been for a while. So, they effectively double the spread to put people off.
You may wish to query this with HL if they have misrepresented the charges of the fund.
You wouldn't have been put in it. So, would never have been charged it.
What is the definition of 'soft closed' are you saying these high spreads could have been predicted?
This is the information HL sent me prior to me purchasing the units when I queried how to interpret the spread. Highlighting is mine.Unit trusts, such as AXA Framlington Managed Income, have two prices; the offer (or buying) price and the bid (or selling) price. The difference between the two is known as the bid-offer spread and includes the initial charge plus all the costs to buy and sell a unit. A Unit Trust will be bought at the creation price plus the net initial charge (offer price) and will be sold at the bid price.
The ‘spread’ for Unit Trust funds is the spread between the buying and selling price. The majority of this spread is made up of the initial charge, although there is a small spread between the creation price and the bid price which cannot be discounted. For example, a fund may have a bid –offer spread of 5.5%, of which 5% is made up of the initial charge. The remaining 0.5% is the difference between the bid price and the creation price. This can vary from fund to fund but is typically around 0.5% - 1%.
As we are able to offer you a 5.25% saving, on the 5.25% initial charge of AXA Framlington Managed Income fund, you would pay no initial charge and therefore would not purchase the fund at the quoted buy price but at the creation price which significantly reduces the spread.
Using the example of the AXA Framlington Managed Income fund, income units and yesterday’s quoted price of 192.50p to sell and 204.80p to buy, taking into consideration the full discount we offer on the initial charge you would have purchased the fund at the creation price of 194.45p. As a result the bid offer spread is greatly reduced.
This will apply only to Unit Trusts, as OEIC funds have the same buy and sell prices. The initial charge of an OEIC fund is simply added to the price when units are purchased and no bid-offer spread applies. If we offer savings on the initial charge for an OEIC, you would buy at the valuation point of that day. If the initial charge is not fully covered, this will be added ontop of the valuation point.
We have a guide to Fund Prices, Savings and Yields which may be of assistance to you with regards to the spread of funds and how initial charges can help. It can be downloaded from the ‘Free Guides’ section on our website.0 -
What is the definition of 'soft closed' are you saying these high spreads could have been predicted?
It is when a manager doesnt want to close a fund to new business completely but wants to reduce the amount coming in. Some will stop direct applications but still accept platforms or have higher investment amounts (like Troy Trojan) or introduce a wider spread to put you off.
So yes, this could have been predicted as the fund was known to have a spread this high.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
It is when a manager doesnt want to close a fund to new business completely but wants to reduce the amount coming in. Some will stop direct applications but still accept platforms or have higher investment amounts (like Troy Trojan)
Could you explain what you mean by 'higher investment amount' please. A couple of weeks ago on HL I switched £250 into Troy Trojan, my first ever investment in that fund, and it went through fine. Thanks.0 -
deadpeasant wrote: »Could you explain what you mean by 'higher investment amount' please. A couple of weeks ago on HL I switched £250 into Troy Trojan, my first ever investment in that fund, and it went through fine. Thanks.
Troy Trojan has been soft closed but they have gone down the route of introducing a £250,000 minimum investment and a 5% initial charge for those going direct through them. Platforms are exempt from this (at this time).
The AXA fund mentioned didnt exclude platforms.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
so how can we tell what state a fund is in then? By the spread alone or further research?Troy Trojan has been soft closed but they have gone down the route of introducing a £250,000 minimum investment and a 5% initial charge for those going direct through them. Platforms are exempt from this (at this time).
The AXA fund mentioned didnt exclude platforms.
cheers fj0 -
so how can we tell what state a fund is in then? By the spread alone or further research?
Spread is the best way. Sometimes factsheets will disclose it.
However, factsheet wouldnt have worked in this case. I hadnt realised that this fund had reopened from its soft closure (its not a fund that I use but I remember it being soft closed - just not that it re-opened). However, looking at the annual report, it says it was operating on a maximum 8.17% bid/offer spread as at 14/01/2011 (that would include the "normal" 5.25% initial charge).
Cepheus. can you verify what fund it is. Your post and link goes to the Axa fram managed income fund but the unit prices given by HL as their example in the response is not close to the fund price to the fund you have linked. The spread for the fund is around 6% currently. So, with 5.25% not taken, it should have only been a small initial cost to you. Yet the prices in the HL response indicate an approx 5% spread even with discount.
For the record, yes, OEICs are so much easier.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
I purchased AXA Framlington Managed Income Fund Accumulation Units on the 14th October at a price of 620.59 XD
However in the example they gave me when I enquired back in July, they quoted the income units,Using the example of the AXA Framlington Managed Income fund, income units and yesterday’s quoted price of 192.50p to sell and 204.80p to buy, taking into consideration the full discount we offer on the initial charge you would have purchased the fund at the creation price of 194.45p. As a result the bid offer spread is greatly reduced.
would this make any difference to the % spread?0 -
would this make any difference to the % spread?
It is just that their spread after their "discount" seems higher than the published spread.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0
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