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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.

Invesco left swinging as it denies 'levy' on Woodford sellers

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.

Around £1 billion or 4% of the money in the Invesco Perpetual Income and High Income funds has been withdrawn since Woodford announced he would leave the group next April to set up a new firm.

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.

20 comments so far. Why not have your say?

Alan Jay

Nov 05, 2013 at 17:26

Easy solution: stop buying OEICS and turn to Investment Trusts where pricing is open and transparent.

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Nov 05, 2013 at 18:18

Agree with Alan.

But I also worry about the buy/sell spreads on some Investment Trusts.

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Tony Peterson

Nov 05, 2013 at 19:45

Easier still solution.

Create your own fund by buying your own shares directly.

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Aidan Williams

Nov 05, 2013 at 20:30

ITs still have the equivalent problem of discounts and premiums. And often the charges are far from open and transparent. I struggle to understand and evaluate some of the bonus conditions, hurdles and caps. Although I still prefer ITs in the main.

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Andrew McDougall

Nov 05, 2013 at 23:07

When I sold my units of the Invesco Perpetual UK Strategic Income Fund the very next day after Woodford's departure was announced, (I didn't fancy the future task facing Mark Barnett), It was painfully obvious that Invesco had reduced the bid price of that fund by at least 2.00%.

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Tony Peterson

Nov 06, 2013 at 07:34

Financial institutions are run for their own financial benefit. not yours. That benefit comes from helping themselves to dollops of their investors' money. Having hyped up the supposed genius, they stood to lose when he moved on. Obviously they would have sought a way to profit from his departure.

Hence the levy. A way to profit from the fall in punter numbers.

Do it yourself. Woodford was never a genius. He struck lucky a few times. Made mistakes too. And you guys fell for the hype first, and the levy later.

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John Coles

Nov 06, 2013 at 09:02

What a splendidly condescending comment, Mr Peterson.

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Nov 06, 2013 at 09:10

Yes, Tony, you are correct. Have most of my stuff direct in shares. Like you say, DIY!

However, I have SSE, UU. and SVT for income in an ISA, all dropping now that the politicians have decided they can run things far better with lower cost to the consumer than the private sector.

Have sold half hoping to get back in cheaper when the furore dies down, hopefully before the next ex-diividend date. Not easy! Anyone have a better idea?

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Alexander P

Nov 06, 2013 at 10:31

You guys need to be careful slapping each other on the back so many times could cause severe injury and then you might need a doctor probably a quack a DIY version of course.

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tony williams

Nov 06, 2013 at 12:34

well said peterson

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Anonymous 1 needed this 'off the record'

Nov 06, 2013 at 16:17

it was because of the great Woodford`s opinion that I sold my Vodaphone shares, 12k of them @ 186, (with the intention of buying back) so I don`t have a great feeling of loss at his departure

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Tony Peterson

Nov 06, 2013 at 17:47

That's tough, Anonymous. It was taking a contrarian view to the great Woodford that caused me to add shedloads more Vodafone at 156 and 157 last Christmas. Thank you, Neil.

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on the other hand

Nov 06, 2013 at 17:56

Its a bit disingenuous to say that Neil Woodford outperforming the FTSE All Share 8 of the last 10 years, and by an aggregate 70% was just "striking it lucky a few times"

Moving the price 0.28% from mid to bid to protect investors doesnt exactly sound like "helping themselves to dollops of their investors money" either. Interestingly the bid offer spread on Glaxo stock (Woodfords biggest holding) today is 0.03%, the spread on Cenkos (one of the smallest) is over 4%. Seems quite sensible to protect fund investors from this to me.

And to answer Mr McDougall, the reason the fund fell the day after the news was knee jerk reaction in the market causing a few of the biggest holdings to sell off significantly on expectation that Mark Barnett may cut them

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Anonymous 1 needed this 'off the record'

Nov 07, 2013 at 13:05

Yeah Tony, I bought at 156 and was `being clever` protecting a profit even knowing that the Verizon thing was somewhere in the not too distant future.

You live you learn, unless of course, you starve in the meantime, well done you though and the millions not as stupid as me. Whether to eat my pride and buy in again is another thing.

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Tony Peterson

Nov 07, 2013 at 16:31

On the other hand.

Dropping the bid price on a fund on the utterly specious grounds that they were protecting other investors - that is what is disingenuous. Not me.

The underlying equties held in the Invesco fund have not reacted to Woodford's departure. It was just one last chance for the firm to carve a significant percentage from those punters who had been pulled in by the hype of Woodford's supposed brilliance.

Those punters - including some posting here - were, as I have said, hooked by the hype, then landed with the levy. And it was a levy. An unfair levy at that.

The firm is being economical with the truth. It should be reported. Forced to repay that unwarranted 2% hit.

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on the other hand

Nov 07, 2013 at 17:04

By stocks not falling i presume you mean the share prices of the likes of BAE Systems, Capita, Imperial Tobacco and G4S, all of which feature in the Invesco Perpetual High Income fund, and all of which fell sharply following the announcement of his departure.

Capita for example is his 10th-largest holding. It fell more than 3 per cent on the announcement of his leaving.

Bearing in mind the FTSE 100 fell the best part of 1% from midday to midday on that day too, a 2% move in the fund price is really not unexpected. I would have thought an experienced share investor would have worked that out.

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Anonymous 1 needed this 'off the record'

Nov 07, 2013 at 17:33

By stocks not falling i presume you mean the share prices of the likes of BAE Systems, Capita, Imperial Tobacco and G4S, all of which feature in the Invesco Perpetual High Income fund, and all of which fell sharply following the announcement of his departure.

But he doesn`t manage any of these companies so why should their share price or the FTSE level have anything to do with his departure.

I would have thought an experienced share investor would have worked that out.

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on the other hand

Nov 07, 2013 at 20:06

Technically it doesn't matter why the share prices fell, just that he holds them is enough to cause the fund price to fall.

Interestingly there is significant market speculation that the departure announcement caused the fall. The thesis goes;

Funds managed by NW are significant shareholders in these stocks, in some cases he is the largest, holding more than £1bn of some names. The appointed successor, Mark Barnett, does not have such a favourable view of some of these companies and its possible he could choose to sell. Understandably some other holders of these shares consider that the sudden sales of billions of pounds of stock could have an adverse effect on the price and so they sold out causing the price falls.

The FTSE fall was clearly unrelated but still of course affected the fund value as thats where most of his exposure is.

Hope that helps clear things up.

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Nov 11, 2013 at 14:08


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Nov 24, 2013 at 13:51

I'm getting Max premium bonds asap.At least they won't go down and I will get lucky 26000 to 1

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