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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