Investors in unitised funds - the prices of which are regularly listed in the business pages of most newspapers - are often quite shocked to discover that the published price seldom resembles the amount they get when they encash their units.
The reason has to do with the pricing devices that unit-linked companies can apply to the price of units in relation to the net value of their underlying assets - i.e. the stock, shares, property and cash that would make up most popular managed funds.
Recently, the British regulator, the Financial Services Authority (FSA), decided that the way in which investments in Britain are priced - unit trust PEPS being the most popular combined investment there - are too complicated for ordinary people to understand. It has decided that all companies must introduce a single price for units instead of the 5 per cent bid-offer spread which results in a different price for buyers and sellers. This new rule, which is expected to be introduced by 2001, will also apply to other savings accounts - typically, unit-linked investment funds, the most popular type of unitised investment sold here.
What happens in Britain eventually happens here, and financial advisers who have been critical of the dual - and complicated - pricing of investment units are welcoming the British development. "In Europe, where pooled investments like UCITS are prevalent, it is illegal to vary the unit price against the net asset value," one independent financial adviser told The Irish Times. He added: "European funds like UCITS and SICAVs, the open-ended investment companies in which you are also a shareholder of the company, provide not just a daily price for the units of shares held, but regular financial statements and audits of the activity of the funds. These companies, which include the likes of Flemings or HSBC or Gartmore, provide easy access on their websites as well. In effect, you can peer over the fund manager's shoulder to see the actual companies that make up the fund and see how the value of those shares are moving."
According to critics, unit-linked companies price their units in a totally non-transparent way. Two methods can be used according to a code of practice suggested by their own Institute.
The first is a continuous equity unit pricing which always moves in line with the value of the underlying assets. The second is a smoothed equity pricing which allows the unit price to follow the average price of the assets, usually over a week, but sometimes over a shorter period.
Critics of the latter method, which is used by most unit-linked companies, claim it allows too much arbitrary pricing, if, for example, there is a run on the fund by a big investor pulling out a big chunk from a fund. If the actuary feels this is going to have a particularly adverse effect on the remaining units he or she can price the units in a way that reduces the price the seller receives.
Actuaries have challenged this interpretation of their scope for pricing units before, but in Britain at least, the regulator is siding with the European pricing method which lets investors more accurately establish the price of the unit of value they own as well as compare the charges of one fund against another more easily.
The introduction of single unit pricing in Britain would be a major development. But commentators believe it will only happen if it comes in the form of a European-wide initiative.
