Why spreads are important, especially in volatile markets
If a fund doesn’t have a buy/sell spread (or tools like swing pricing), these costs can create inequities between investors, as transaction costs associated with client cashflows are borne by all investors within a fund rather than the transacting investor. A great example of this is what happens when an investor withdraws from a fund with no spread, being that the associated transaction and brokerage costs are incurred by the fund after the investor has left. This in turn negatively impacts the fund’s performance. Recently some sectors, especially fixed income, have experienced low liquidity, meaning trading costs increased, particularly when selling securities. Many global fixed income fund managers widened their spreads in recent times to reflect this.
Global best-practice is for funds to recoup transaction costs directly from the actual investors investing in or divesting from the fund, via buy/sell spreads, or similar tools like swing pricing. However, NZ is still a bit of the ‘wild west’ when it comes to spreads, with many funds not having them.
- The FMA has advised buy/sell spreads should be regarded as ‘trading costs’.
- Buy/sell spreads still need to be disclosed in the PDS and, as they go to the fund rather than the manager, they do not need to be described as ‘fees’.
- As buy/sell spreads can change rapidly in stressed market conditions the FMA is comfortable with including indicative buy/sell spreads in the PDS.
- If buy/sell spreads in the PDS are indicative, there needs to be a reference to where investors can obtain the current rates.
At IIS we believe that spreads are good practice as they create equity for investors, and we encourage all of the clients we issue and manage funds for to use spreads, or tools like swing pricing. Our approach to date has been to disclose the current spreads in the relevant PDS, however we have recently made the decision to change the way in which we disclose spreads. Following FMA guidance, we now provide indicative buy/sell spreads in the PDS and the current buy/sell spreads are available on our website. The indicative spreads in the PDS are then updated each time the PDS is updated, to reflect the spreads at the date of issuance of that PDS, or when there is a material change in the level of the spreads.