Unit trusts and OEICs

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9. Pricing of units - historic and forward pricing

Remember that the basis for calculating offer and bid prices on unit trusts is the net asset value of the trust's assets, and that the NAV is calculated once a day.

Suppose, for the sake of argument, that the valuation point is 12pm. For someone trading exactly at 12pm, a price based on that NAV would be 100% fair and accurate.

But what about someone trading at 4pm in the afternoon, when the actual NAV may have risen or fallen away from the NAV at the 12pm calculation point. Should pricing still be based on the out of date NAV?

Unfortunately, unit trust NAVs are not recalculated in real-time, so pricing has to depend on a NAV at one fixed point in time. Since 1 July 1988, fund managers have had a choice about which point in time they pick - the last one or the next one:

1. Historic pricing
   • Historic pricing entails basing prices on NAV calculated at the last valuation point.
   • The advantage is that buyers know exactly how many units they are going to get for their investment and sellers know exactly how much money they will get for their units.
   • Managers are open to the risk that the trust's assets may increase between the valuation and dealing points, in which case the units will be underpriced.
2. Forward pricing
   • Forward pricing, which is the norm, entails basing prices on NAV calculated at the next valuation point. So someone buying units at 4pm in a trust which uses a 12pm valuation point, will buy on the basis of a price calculated on the next day's 12pm valuation.
   • The disadvantage is that buyers do not know how many units they will get for their money, and sellers do not know how much money they will get for their units, until after the next valuation point. To an extent they are buying and selling 'blind'.
   • The managers like it, of course, because there is no risk of mispricing.

1. What is a unit trust? 2. What is a unit? 3. The trust deed and scheme particulars 4. The people behind a unit trust 5. Charging structure of unit trusts 6. Pricing of units - FSA rules on maximum offer price 7. Pricing of units - FSA rules on minimum bid price 8. Pricing of units - in practice 9. Pricing of units - historic and forward pricing 10. OEICs - Open Ended Investment Companies 11. Shares in OEICs 12. OEICs - pricing 13. OEICs - charges 14. Taxation of unit trusts and OEICs - Introduction 15. Tax treatment of dividends from equity funds 16. Tax treatment of coupons from non-equity funds 17. Capital Gains Tax 18. Tax shelters 19. Investment powers of fund managers: 'eligible investments' 20. Diversification 21. Fund classification: risk gradings 22. Selecting a fund: Defining your objectives 23. Selecting a fund: Active vs passive 24. Selecting a fund: lump sum vs regular savings 25. Selecting a fund: Past performance 26. Where to buy unit trusts and OEICs 27. Buy with or without advice? 28. The mechanics of buying 29. The mechanics of selling 30. Share exchanges and fund switches 31. Investor protection 32. Conclusion

• Exchange Traded Funds