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'Buy' and 'sell' fund pricing spreads confusion

'Buy' and 'sell' fund pricing spreads confusion

A roster of fund management groups have this year ditched 'buy' and 'sell' pricing on their funds, but there is a long way to go before all funds in the UK adhere to the same pricing structure. 

Schroders, Artemis, Rathbones and Hargreaves Lansdown have all announced plans to revamp fund pricing this year, allowing investors in all their funds to be quoted the same price whether they are buying in or selling out.

But the practice of offering two fund prices - one for buyers and one for sellers - is still prevalant. BlackRock still employs 'dual pricing' on a large number of its fund, as do Jupiter, Legal & General, Marlborough, Liontrust and iShares.

Others who employ the pricing structure on selected funds include Janus Henderson and Neptune, while Threadneedle and Aviva Investors reserve it for their property fund.

This dual pricing, similar to the bid and offer pricing on investment trusts and shares, effectively incurs investors a cost in the form of the 'spread' or difference, between the two.

This can be high in some cases, although, confusingly, not as high as it might seem at first.

Spreads can seem higher than they are

Take the Marlborough Nano-Cap Growth fund, where the spreads between the buy and sell prices on all three share classes are just above 10%, according to yesterday's prices.

But that spread also includes the fund's 5.25% initial charge, a cost that most investors in funds, who buy them on platforms, do not pay. As that is then discounted, it more than halves the cost, although at just under 5%, it remains substantial.

Marlborough pointed to the nature of the fund's investments in defending the size of the spread. The spread on fund prices reflects the dealing costs involved in investing. And the shares the fund managers will invest in will carry their own spreads between bid and offer prices. In the cases of less liquid, smaller stocks these will be larger.

‘The fund invests in some of the UK’s smallest listed companies,' said a Marlborough spokesman.

‘The spreads on these nano-cap stocks are far wider than those on, for example, FTSE 100 stocks and this is reflected in the spread on the fund itself.’

Just under 80% of the fund's assets are held in what the manager deems 'micro' companies, with market caps of less than £250 million. And it's worth noting the management team led by Citywire AAA-rated Giles Hargreave have justified that higher cost with returns of 53.9% over the last three years, ranking sixth of 49 funds in Citywire's UK All Companies sector

Inconsistent quotes

Confusingly, prices for the same fund are not always quoted consistently between platforms and fund providers. For the BlackRock Growth & Recovery fund, the spread between the 'buy' and 'sell' prices is 8.1% for both the income and accumulation versions of the fund on Hargreaves Lansdown. But on BlackRock's own website, the spread is just 2.6%.

Hargreaves includes the initial charge of 6% in its calculation of the spread, and given that is discounted, that reduces the spread to something closer to that quoted by BlackRock. But the disparity between the two at first glance doesn't help bring clarity to what is already tricky area to navigate.

Enquiries about other funds with seemingly high spreads also yielded surprising results. A range of HSBC Global Investment Funds stood out on Hargreaves Lansdown due to spreads of up to 4.8%, although the bulk of that was likely to be due an initial charge factored out of the equation with the discount.

But HSBC told us those funds were actually single priced and, since making our enquiries, they now appear as such on the platform. The same was the case with the JPM Global Macro Opportunities fund.

Along with funds investing in 'small-cap' shares, those focused on even-more-illiquid property, where they offer 'buy' and 'sell' pricing, tend to have large spreads.

The Legal & General UK Property Trust Feeder fund, for example, carries a 5.7% spread, and, with no initial charge to be discounted from that, investors will shoulder the full effective cost.

Legal & General says in a note on the fund on the pricing section of its website: 'This fund has a large difference between buying and selling prices for units/shares  because it allows for the high costs of buying and selling commercial property.

'There is also an allowance for stamp duty land tax that would be incurred when any commercial property is purchased. This tax is currently 4% of the purchase price of the property.'

Is single pricing better?

The direction of travel among fund groups is unambiguously towards single pricing, and it's easy to see why it is appealing to investors. The costs involved in the spreads in the investments the fund manager is buying are still reflected in the fund's returns, but an individual investor won't see an immediate 'loss' on their platform portfolio, reflecting the size of the spread, when they buy the fund.

It's also the product of changing fund structures among open-ended funds. Unit trusts, which tended to offer dual pricing, were the main form of open-ended fund until 1997, when open-ended investment companies (Oeics), which tend to offer single pricing, were introduced. Most open-ended funds are now Oeics.

‘It’s really up to fund groups to make their own decision in terms of what is best for their client base,’ said Laith Khalaf, Hargreaves Lansdown senior analyst.

‘If you were starting from scratch now, you would probably start with single pricing structure. It’s a legacy issue for some – there needs to be an impetus for change.’

Single pricing is not without its complications, meanwhile. When a single-priced fund is facing a high number of buy or sell trades, it can deploy a ‘dilution adjustment’ or 'swing' mechanism.

This was a tactic used by Invesco back in 2013, when Neil Woodford left the group to set up his own firm, taking a lot of investors with him.

Following a wave of investors exiting the Invesco Perpetual Income and High Income funds – both Oeics – the group lowered the price by around 0.28% for those selling up. This effectively charged the costs involved in selling the assets it needed to dispose to fund the redemptions to those investors who were leaving them, rather than spreading them among all of the fund's investors.

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