By JOHN SPIERS 04/06/2010
Legal & General have just announced a new pricing structure that will add more than 5% to costs on some of their funds (even when there is technically no initial charge). We think this is a seriously retrograde step for the fund management industry and urge them to think again.
Background
Unit trusts and OEICs are generally priced on one of two bases depending on whether there are net buyers or sellers. This process is designed to make sure that existing unit holders are not disadvantaged by other investors either buying or selling. The difference between these prices reflects the different prices involved in buying or selling the underlying investments in the fund. In the case of funds investing in less marketable securities such as smaller companies or in property this spread can be more than 5%. As a result, the published unit price can swing quite sharply from day to day depending on whether there are net buyers, or sellers, of units.
The new policy
Legal & General have decided to amend their pricing policy in a way that will eliminate this volatility in pricing but also, perhaps coincidentally, make them much more money. From June 7th all buyers of their units will pay the buying price, even if there are net sellers on that day, whilst all sellers will receive the cancellation price, even if there are net buyers. This will add considerably to investor costs, over 5% in the case of some funds. Moreover, this will be reflected immediately in terms of valuations, since these will reflect the lower price.
Our view
We think this is not acceptable. Why should L&G pocket over 5% simply for matching up buyers and sellers? If they want to reduce price volatility then they should use some of the capital to provide a ‘box’ position to smooth out daily inflows and outflows.
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