Schroders falls in line and dumps dual pricing

Schroders has announced it will bring the pricing of a number of its unit trust funds in line with a single pricing structure but it is unclear whether this will be cheaper for investors.

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From 17 September the pricing of Schroders’ units will be based on a single mid-market price.

Swing pricing sees investors pay a single price when purchasing or redeeming shares instead of paying a separate offer price and bid price under the dual pricing structure used by unit trusts.

Like the bid/offer prices, the single price of a fund is subject to change. Depending on the level of cash coming into or out of a fund, the price will swing in either direction to reflect a change in the size of the underlying asset pool.

Some of the UK’s biggest asset managers, including Blackrock, Legal & General Investment Management and Schroders, have come under fire in recent years for pocketing “box profits” resulting from the bid/offer spread on their unit trusts.

The FCA has banned box profits in the final rules and guidance that came out of the asset management market study.

Since Mifid II, a number of providers have committed to scrapping dual pricing on their funds. Jupiter took a “proactive decision” to switch to single pricing a year before the new regulation came into effect.

James Rainbow (pictured), co-head of UK intermediary, said making the switch to single pricing “will provide greater simplicity for investors” and “brings the fund in line with the rest of Schroders’ UK fund range, which already operates, on a single pricing basis”.

Are investors better off?

Darius McDermott managing director of Chelsea Financial Services said the change was “not a major issue” for Schroders and will be “more consistent with Mifid” rules.

But he said whether investors will be getting a better deal depends on whether the swing price is lower than the bid/offer spread.

Three of Schroders’ largest unit trusts affected by the move, Schroder European Alpha Plus, Schroder High Yield Opportunities and Schroder UK Mid 250, have a spread of 20bps, 95bps and 77bps respectively based on yesterday’s close.

“If the swing were bigger, then clearly you’re better off having the dual price,” said McDermott. “I guess it’s going to be less, but I don’t know.”

Schroders has published diluted adjustment estimates for purchases and redemptions (see below).

The £360m European Alpha Plus fund has an expected diluted adjustment of 15bps for purchases and 11bps for redemptions, while the £703m High Yield Opportunities fund has an expected swing factor of 48bps for inflows and outflows.

The Schroder UK Mid 250 fund has a higher swing factor for subscriptions at 64bps but a lower swing price for outflows at 22bps. The trust stood at £1.2bn as at 18 July 2018.

Nasty funds

But it’s not just the swing factor that counts; the percentage of outflows and inflows required to trigger an upward or downward movement in price is also important, said McDermott.

He said he has encountered some “nasties” over the years that have had daily redemption limits which were disproportionate to the size of the fund.

“I’m not against swing pricing but it should be proportionate to the fund size,” he said.

In a note to clients informing them of the pricing policy change, Schroders said it will adjust the price upwards if net inflows exceed 1% of the fund’s value and downwards if outflows exceed 1% of the fund’s value.

The fund’s price will not swing if net dealing on the day does not exceed the 1% threshold and the published price will be the mid-market price.

McDermott said the fact Schroders is bearing any costs associated with the changes is a good thing and noted they have made consistent and sensible decisions in the past.

The affected Schroders funds include:

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