The way we price many of our funds is changing. This is to standardise the method used across most of our unit trust range of funds and further mitigate the impact of ‘dilution’ on the value of your investments. The change to the pricing method will be implemented on 1 December 2020.
What is a pricing method?
A pricing method is the way that we calculate the prices of funds to ensure all investors are treated fairly. There are different methods for calculating the price of a fund. Each method has a different way of allowing for the costs of buying and selling the fund’s assets when the fund is growing or reducing in size.
Moving our funds to single swing pricing
Single swing pricing is a method designed to ensure fair treatment for all investors in the fund, and is the most widely used pricing method in the funds industry. The way it works is that all investors who are investing into a fund or taking money out of a fund are quoted the same price. That single price generally sits at a ‘mid’ point. However, when there are particularly large purchases, the price ‘swings’ up. The same process happens for withdrawals, where the price can then swing down. This makes sure that the dilution costs caused by these transactions are covered by those either entering into or exiting the fund and not by you, the fund’s investors.
The Legal & General UK Property Fund and Legal & General UK Property Feeder Fund will not be changing their pricing method. Our research showed that the particular nature of investing in physical property justifies maintaining the current dual priced method, in particular to encourage long term investing and to mimic the charges that most customers will be familiar with when buying property. The Legal & General Real Income Builder Fund will also not be changing its pricing method as this fund is structured in a way that links it to another fund structure and therefore it was considered to be in the best interests of investors to retain the current pricing method for this fund.
What is dilution?
When an investor buys into a fund, the fund manager invests the new money into the market. There are costs to placing money into the market such as brokerage fees (similar to costs you might be charged when purchasing a share in a company).
Another cost is when you buy an asset. It will often cost more to buy the asset than the price at which you could then sell it yourself. For example, when buying a car, you would generally have to pay the dealer more to buy it than the cash value you might receive if you were to trade in the exact same model.
If these costs are not covered by the investors entering into the fund, then they will be paid by all the existing investors and lower the unit price. This is what’s known as fund dilution.
Fund dilution can also occur when an investor is taking their money out of a fund. When an investor wants to take their money back, the fund manager has to sell some underlying investments to cover this which can again incur costs for investors who remain in the fund.
Is this change legal?
How will this change affect the value of my investment?
The letter mentions that in limited circumstances the price when selling will be marginally lower under the new pricing method. When would this happen? How will I know this has happened? Will I be compensated for this?
Why aren't the Real Income Builder (RIB), UK Property & Feeder funds changing?
When will the price swing up or down?
Are you able to let me know what the swing thresholds are for each fund?
Download a copy of our Guide to Swing Pricing and our investor letter below.
How were the funds priced before the change?
As our range of unit trust funds has grown over the years, a number of different pricing methods have been used across the range:
Dual pricing means all investors buying into the fund pay a higher price than investors selling out of the fund. The higher price paid by investors buying into the fund is the offer price. The lower price paid to investors selling out of the fund is the bid price.
Single pricing means the manager calculates just one price at each valuation point. Investors buying units in a fund or selling their units do so at the same price on each dealing day.
Single quoted swinging dual price is similar to the dual pricing method. We calculate both an offer and a bid price and, depending on whether there are more net inflows or outflows on a given day for a share class, the price for all transactions (buying and selling) will swing between these two prices.
In practice, if the day’s inflows in a unit class are positive, the price used for all transactions (buying and selling) in that unit class will be the higher offer price. If the day’s inflows are negative for a unit class, then all transactions (buying and selling) will use the lower bid price.
Units in a fund are issued and redeemed at a single price on each day (there is no bid/offer spread). We apply a dilution levy when a transaction looks like it may have a negative impact on the remaining investors in the fund. The dilution levy is separate from the price of the units in the fund and is invested into the fund to counteract the effect of dilution.
Information about prices and reports
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