Unit trusts and Oeics are usually priced on whether there are net buyers or sellers so existing unit holders are not affected by other investors doing either. The difference in price is reflected in the buying or selling of the underlying investments in the fund.
From June 7, 2010, L&G has looked remove the volatility by ensuring all buyers pay the buying price, even if there are net sellers that day, while net sellers will receive the cancellation price even if there are net buyers that day.
Spiers says less liquid areas like smaller companies and property can see a spread of more than 5 per cent, meaning the unit price can move quickly should there be a number of buyers or sellers of the units.
Bestinvest says that if you invested £100,000 in the L&G UK property trust, which has a bid price of 39.98p and a 44.24p price for the offer, a £100,000 investment under the new structure would see the value of the investment fall immediately by £9,629.30 to £90,370.704, a 9.6 per cent drop.
Spiers says: “If they want to reduce volatility then they should use some of the capital to provide a ‘box’ position to smooth out daily inflows and outflows.”
L&G managing director of the unit trust business Simon Ellis says the change is because investors could not tell the difference between performance and pricing.
He says: “Investors have asked us to remove the volatility caused by swinging pricing and the best way to do it was to adopt this typical model.”