Facts about funds
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How funds are priced
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The price of a fund unit or share reflects the value of the underlying assets held in the fund and is quoted daily for most funds. This section tells you the rules on how funds are priced and the different methods used to price funds. |
Regulation
The aim of fund pricing is to ensure that investors buy or sell fund units or shares at a price that accurately reflects the value of the fund’s assets. The manager is permitted to select at the outset the most suitable pricing method for a fund, taking into account the nature of the fund's assets and the needs and expectations of the fund’s investors. Whichever method is selected must be recorded in the Prospectus. The regulations require that, once calculated, a price be quoted to at least four significant figures. For example, a figure of 61.3584 pence per unit would be quoted as 61.36 pence per unit. The official prices must then be published.
Fair treatment of investors
Each pricing method is designed to ensure the fair treatment of customers as they become, continue and cease to be investors in funds. When new investors buy units or shares their cash needs to be invested in new assets for the fund and this causes trading costs to be incurred. Similarly, trading costs are incurred when assets are sold in order to pay investors when they sell their units or shares. The effect of these costs is known as "dilution" which causes investors' returns to be reduced. It would be unfair for existing investors to suffer dilution as a result of these costs, so mechanisms exist to protect them.
What the manager has to do
The manager is required to exercise due care in connection with valuation and pricing, and to show that it has complied with the rules. The manager has a duty to ensure that prices used to value investments are correct and to take action to rectify any incorrect valuations. Depending on the extent of any error in valuation, this extends to either reimbursing or compensating any investor or former investor, or reimbursing the fund.
What the trustee or depositary has to do
There is a set of checks that the trustee or depositary must perform to satisfy itself that the manager’s pricing operation is adequately controlled and the risk of incorrect priceing is minimised. This includes a thorough review of the manager’s pricing system and controls to assess their reliability.
Pricing methods
There are three main methods used to price funds - single pricing and swinging single pricing and dual pricing.
Single pricing
Single pricing simply requires the manager to calculate one price at each valuation point. All fund unit or share deals take place at this single price, which is calculated by using the mid-market value of the fund’s assets. When a manager believes significant dilution might occur they might require a dilution levy to be paid. A dilution levy is a charge on the buyers and sellers of units or shares that is paid into the fund to protect existing investors from the effect of dilution.
Swinging single pricing is no different to single pricing in so far as all fund unit or share deals take place at the single price. Initially the price is calculated by using the mid-market value of the fund's assets and it is then adjusted (or swung) by the manager to protect existing investors against dilution. This adjustment ensures that buyers and sellers of units or shares pay for their share of trading costs through their price. For example, when units or shares are being bought, the price will be swung upwards causing buyers to pay slightly more for their units or shares. This additional amount offsets the trading costs that will be incurred in investing the buyers cash in the fund's assets.
Dual pricing
Dual pricing is similar to swinging single pricing in it's effect. However, unlike single pricing, any initial charge is included in the offer price rather than being detailed separately. Initially two prices are calculated - the swung up price, to which is added the initial charge, and the swung down price. Within these limits, the manager determines the fairest prices for buyers and sellers of units or shares. The price to be paid by buyers is the offer price and the price to be paid to sellers is the bid price.