The Dilution Levy with OEICs

  • The Dilution Levy applies to OEICs and other ‘single-priced’ funds.
  • Remember that Unit Trusts are dual priced and have an offer and a bid price for their units. The difference known as the “bid-offer spread” and is a charge for the investment.
  • OEICs don’t have this, so they can charge a Dilution Levy.
  • Since the fund manager is still buying or selling the underlying investments on a dual-price basis in the market, they’re incurring a cost and they would like to pass this onto the investor, only fair really.
  • As well as the bid-offer spread of the underlying investments there are also other costs such as broker dealing fees, foreign exchange dealing costs and Stamp Duty Reserve Tax (SDRT) – or any equivalent charge levied in foreign markets.
  • Dilution is the effect all these costs have on the fund when investors purchase or redeem units. Because only a few investors are buying or selling their units, compared to all the unit holders, the cost is diluted, like you would an orange squash drink. Hence the term dilution.
  • However, to make this fair to those not engaged in buying and selling their units, those that do, get charged a dilution levy.
  • Some fund managers cover this cost themselves from cash in the fund, some feel that they have a good balance of sellers and buyers anyway, meaning that dilution adjustments are rarely applied.
  • It is purely to protect existing investors in the fund from bearing the transaction costs of other parties choosing to buy or sell.
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Paul Archer is a financial services specialist. He has worked with clients in the UK and worldwide in developing their knowledge and skills. He has worked with companies in the UK, USA, Europe, Middle East, India and the Far East sharing best practice from the UK – arguably the most developed and most competitive services sector in the world. He has 35 years of business experience, working with banks, building societies, insurers and brokers. For the last 19 years, he has managed his own training business. Level 4 qualified and holds the mortgage adviser certificates and speaks regularly for the Society of Mortgage Professionals on mortgage-related sales and technical topics and works regularly for the Chartered Insurance Institute delivering technical and skills workshops.

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