Hidden Costs of Fund Investing

In the debate about transparency of fund charges there is one charge that is rarely mentioned - this charge is the dilution levy

Jeremy Beckwith 19 February, 2015 | 11:59AM
Facebook Twitter LinkedIn

In the debate about transparency of fund charges there is one charge that is rarely mentioned. It’s application is left to the judgement of those running the fund, as is its level, which can vary from one day to the next, and, potentially, it inflates a fund’s performance record and misleads investors as to the returns they could have made. This charge is the dilution levy. 

Where an investor either puts new money into a fund or withdraws money from the fund, then these money flows may result directly in portfolio transactions which have costs. The dilution levy seeks to isolate such costs and have the transacting investor bear them rather than the other unitholders.

In theory, this is fair to all parties. However, in practice, it can be extremely complex to administer. For fund flows which are insignificant to the size of the fund, for example a £10,000 inflow into a £1 billion fund, there may be no immediate portfolio transactions to reflect the inflow, and so a dilution levy would not reflect actual costs incurred. Or, more commonly, on any day there are both inflows and outflows to the fund that offset each other, again resulting in no portfolio transactions. If a dilution levy is charged, then establishing the cost or impact to the fund can be a complex calculation requiring assumptions to be made.  Typically the dilution levy is only made known to the unitholder affected (sometimes before the transaction, sometimes only afterwards), not to other unitholders until an Annual Report is published, many months later.  The application of the dilution levy always acts to reduce the total return of the fund to the investor making the transaction.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Jeremy Beckwith  is Director of Manager Research for Morningstar UK

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies       Modern Slavery Statement