Invesco Perpetual has been adjusting the share price of the funds down by 0.33 per cent when returning money back to shareholders, which it refers to as a "dilution adjustment".
The intention is to ensure that investors who remain in the fund are not penalised by paying the costs generated by a large amount of money being withdrawn at once, but it does mean that investors who are thinking of leaving are given another incentive to stay.
Mark Dampier (pictured), head of research at Hargreaves Lansdown, says that the charge is not a surprise and is nothing to be concerned about.
"They [fund houses] do it all the time. It’s not money going to Invesco. It’s a reflection of dealing costs, so people like me who are still in the fund don’t have to pay all the dealing costs. Trojan do it automatically when anybody exits the fund." Open-ended funds need to sell their holdings to generate cash to pay back investors when they exit – after they have used whatever cash or cash-like instruments they hold.
Fund houses have to pay fees to brokers for executing such trades, and will also pay certain taxes such as the POTAM levy on any deal worth £10,000 or more.
In the ordinary course of events, such costs are borne by investors in the funds – although some campaigners such as manager Alan Miller argue they should be charged to the fund house.
In this case, Invesco has adjusted down the price it will buy shares back from investors at to reflect the costs of selling a large amount at once.
Dampier said: "It’s perfectly normal to apply this adjustment to protect existing investors and it is very common – as an investor myself I would expect Invesco Perpetual to do this. Without this adjustment, other investors pay the selling costs of those who have left."
He adds the fact the price has only been lowered by 0.33 per cent suggests that redemptions have been less than some people feared.
"The outflows from these funds have slowed since the announcement and are much lower than we thought they might be," he said.
The dilution adjustment must be calculated with reference to the fees and charges for dealing, commissions and taxes the fund house estimates it will have to pay given the level of redemptions.
Invesco claimed in a conference call at the end of last week that just 4 per cent of assets had been withdrawn, much lower than had been expected .
It is very early to try to gauge the effect of the announcement of Woodford's departure on the funds, but so far they have not been suffering, despite having to sell £960m worth of stock [4 per cent of £24bn].
Performance of funds since 15 Oct
Source: FE Analytics
This is despite the selling pressure that the funds are creating on the share prices of the holdings they sell down.
If funds need to sell a large amount of a particular stock at the same time, it will create downward pressure on the shares in the underlying market, meaning the fund will receive a worse price than if it were selling a small amount.
For this reason, funds can suffer when redemptions are high. However, these costs cannot be passed on through the dilution adjustment.
Invesco is selling 11 per cent of Rentokil Initial’s shares, cutting its holding back from 25 per cent of the company to 14 per cent.
The sale is being priced at a 5.6 per cent discount to the share price when it was announced. The stock is one of Woodford’s.
The portfolios are also suffering thanks to poor results from AstraZeneca and the ongoing troubles of G4S, of which Invesco holds 16 per cent.
The Serious Fraud Office announced last week it will investigate claims G4S and Serco wrongly charged the state on a prisoner tagging contract. Shares took another tumble.
Performance of stock over 1 month
Source: FE Analytics
The effect of the adjustment to the price is very small, amounting to an extra £33 on an investment of £10,000.
Nonetheless a change of 0.33 per cent in the ongoing charges is something that investors would react badly too – it would take the fees on the Invesco Perpetual High Income fund from 1.68 per cent to 2.01 per cent on the year you sold out, for example.
It is something else to think about when selling the fund, although advisers say it shouldn’t dictate your choice.
Darius McDermott, managing director at Chelsea Financial Services, says that the charges should have little bearing on an investor's decision on whether to sell or not.
"You have to take the tough decisions based on your investment philosophy rather than the price," he said.
"I would suggest if you had decided to stick with it, the charge would encourage you to stick with it further."
"If you took a wait-and-see approach, it’s likely as the charge has already been applied that there could be another applied around the time Neil Woodford leaves."
McDermott says that he currently rates the funds as a hold because he is unsure of how Mark Barnett will manage with such a large amount of AUM.
Barnett is highly talented, McDermott says, but he wants to wait and see how he does before judging him. Dampier also rates the fund as a hold.
"Our position remains that investors should stick with these funds for the time being. Those investors who sell will miss out on Neil Woodford’s fund management until the end of April 2014."
FE Trustnet looked in detail at whether investors should sell in a recent article. We also carried an interview with Mark Barnett in which he outlined his plans for the portfolios.
