View the article online at http://citywire.co.uk/money/article/a714809
Invesco left swinging as it denies 'levy' on Woodford sellers
Gavin Lumsden starts a new blog with an explanation of what Invesco Perpetual is doing to investors selling its Income and High Income funds.
Investors who sell Neil Woodford’s income funds following news of his planned departure are not being hit with an exit penalty, Invesco Perpetual has said.
Invesco has responded to this wave of selling by moving its flagship funds to a lower ‘bid’ price – around 0.28% below the ‘mid’ price it says it would normally use – when investors sell.
An email sent by Invesco to leading advisers and brokers explaining its power to alter the pricing of its funds during periods of outflows appears to have caused confusion. Some people have got the idea that the lower price is Invesco is imposing a ‘levy’ on investors withdrawing their money.
In fact all Invesco has done is to ‘swing’, or adjust, its price in a way all fund managers do when faced with a rush to the door by investors. They do this to ensure investors who pull out are not given more money than they are owed, which would obviously disadvantage investors left behind.
Ian Trevers, the firm’s head of distribution, insisted: ‘We haven’t made a dilution levy. Investors have received 100% of their sales proceeds.’
The problem lies in Invesco’s confusing choice of language and the inherent complexity of fund pricing.
In the terms of the funds’ prospectus – which Invesco drew brokers’ attention to – the company refers to its power to apply a ‘dilution adjustment’.
This confuses two concepts. To understand why, you need a refresher course on fund pricing.
Like many funds, the Invesco Perpetual income funds are open-ended investment companies (Oeics) with a single price. Single priced Oeics were introduced in the 1990s to make things easier for investors to understand. It is doubtful whether they did simplify matters because the rest of the stock market runs on a dual-pricing, buy-sell, bid-offer system.
Under dual pricing, which all share investors will recognise, investments are ‘offered’ to the public to ‘buy’ at a slightly higher price than they are ‘bid’ for when investors want to ‘sell’. That spread is the broker or investment company’s margin, covering their trading costs and generating a profit. Old-fashioned unit trusts used bid-offer pricing too.
Managers of Oeics have the problem of how to reflect the fact the investments they hold on behalf of investors are dual priced when they themselves offer a single price. Their response is to have a flexible price that moves not just in response to changes in the price of their underlying investments but also in response to the demand of investors.
When a lot of investors are selling fund managers are going to want to set the price at the lower ‘bid’ end of the spectrum to cover their increased trading costs and ensure these are not borne by other investors.
Fund rules give Oeic managers two options in this situation: they can ‘adjust’ the price in the way I’ve just described OR they can impose a ‘dilution levy’, which is an extra charge taken from investor’s sales proceeds.
Unfortunately, Invesco used the term ‘dilution adjustment’, which sounds like neither one thing or the other!
Trevers insisted Invesco had done nothing unusual. ‘All funds are doing this all the time,’ he said.
Mark Dampier, head of research at Hargreaves Lansdown, the country’s biggest fund supermarket, agreed this was normal practice but criticised the way Invesco Perpetual had communicated its policy. ‘I think their wording is highly ambiguous,’ he said, adding it was bad for the investment industry to have such confusion.
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