Normally when you buy something, you know what price you will be paying when you make the purchase. However funds are typically priced using something known as “forward pricing” which means that you don’t know the price until after the investment or sale has been placed. We wanted to explain how fund pricing works and how this impacts buying and selling funds.
How are funds priced?
Funds are collective investment structures where the money of lots of investors is pooled together to buy a portfolio of underlying investments. The investments that the fund makes depends on the fund and its objectives; these could be shares, other funds, government / company bonds, certificates of deposit and so on. (You can find details of what a particular fund invests in as well as the fund’s objectives in their Key Investor Information Document or “KIID”. The KIIDs for the funds that Beanstalk offers which are available here).
The value of the underlying investments that the fund has invested in fluctuates so funds are typically priced by working out what all the assets in the fund are worth and subtracting any liabilities. This is known as the Net Asset Value (NAV) and as the value of the underlying investments rises and falls, so does the NAV.
Funds normally do this calculation and publish a price once each working day, typically at noon, meaning that unlike shares, there is no continuous pricing of fund units during the day. (To check when your funds value, you should check the specific factsheet for the fund). It is the value at this noon valuation point which is then used as the basis for pricing buy and sell orders made prior to that point.
Some funds, but not those offered by Beanstalk, also have a different price for those buying or selling the fund. The price difference covers the costs of creating or cancelling units when people buy and sell. Single-priced funds already include this cost in their fees.
What does this mean for buying and selling funds with Beanstalk?
When you look at your Beanstalk account, the valuation you see will be based on the latest available valuation point. This will normally be the midday valuation point from the previous working day, but as the daily valuation takes time for the fund manager to calculate/communicate, at certain times in the day, the valuation may be based on the day before.
Orders placed to buy or sell funds happen at the next available valuation point after the order is placed. What this means is that you do not know the exact price that you will buy or sell at until after the trade has taken place. This is particularly true when markets are volatile and are fluctuating wildly.
How it works with Beanstalk is as follows. When a contribution is made through Beanstalk, it triggers an order to be placed according to the allocation in place at the time. Orders will be routed by the Custodian to the appropriate fund manager for execution at the next available valuation point for the particular fund that is being bought. Depending on when the cleared contributions are received in the account and the time taken to place the order this could be the same day or the next working day.
Contributions made to your account are initially made into a “pooled” client account held by the Custodian from which they are reconciled to your individual Beanstalk account. Although this reconciliation will often happen immediately, it can take longer if, for example, the contribution had been made without triggering it in the Beanstalk app, if the bank account making the contribution does not match that on the Custodian’s system or if the payment needs to be checked in our compliance process. This means that we cannot guarantee exactly when contributions will be traded.
If you change the allocation on your account, you are essentially first selling units in the fund you want less of and then buying units in the other fund you want more of. The Custodian uses the valuation in place at the time you change allocation to calculate how many units to sell to achieve the new allocation. However how much the sale actually generates will depend on the price at the next valuation point. Similarly when the buy order is placed for the other fund, how many units are actually bought will depend on the sale proceeds and the price of the other fund at the time. This could be a couple of days later as the buy order is not processed until the sale order "settles" (i.e. the proceeds from sale are available).