In comparison to just a slight reduction in fees, the risks associated with selling and rebuying are significant.
Selling one share class to buy another #
Fidelity releases a list of the top 10 traded investments each month. Rathbone Global Opportunities Inst Acc, which ranks eighth this month, reported that, unlike any other fund, every single one of its trades was a sell. Not one buyer. At all.
As an owner of the funder, you can imagine how alarmed I was to discover that every other investor had completely abandoned what I had previously believed to be a perfectly well-managed fund.
On the other hand, for Rathbone Global Opportunities S Acc (#6 on the list), an amazing 98% of its trades were purchases. And now the reporting started to make more sense. They are two different share classes of the same fund. And S class' annual fee is 0.16% less than the Inst class' (after negotiated discount).
This shows that investors still like the Rathbone Global Opportunities fund but, understandably, they would rather be paying lower fees. They are selling one share class to buy the other.
Rebuying risks #
The risks of selling and rebuying, however, outweigh a slight reduction in fees. Due to unfavorable market or price movements, it would be simple to lose 1% or more, and it would take a long time to recoup that loss. Something I learned this the hard way when I switched share classes in another fund when a less expensive share class appeared.
Investors should have the choice to convert their fund holdings—instead of selling and buying again with a switch—by exchanging the units in one share class for another. Investors, however, are rarely given the choice to convert. Therefore, they are obliged to assume the switch's chances, as the Fidelity list demonstrates.
The importance of conversions #
My investment in the Rathbone fund is with another well-known platform rather than Fidelity. I called them to ask for a conversion, but after attempting to explain what a conversion was to the first operator, a second informed me that they don't provide this service to clients. I was instructed to change. I asked them to escalate, but I don't have much hope.
Strangely, the FCA hasn't addressed this issue in their platform research despite the fact that they normally seem to be quite interested in better deals for investors through less expensive share classes. Before a transfer out, as well as maybe after a transfer in, they might require that platforms convert share classes. However, they haven't addressed the scenario in which a current consumer can access a more affordable share class.
Discounted share classes seem like they are here to stay, and I hope platforms will realize the importance of conversions.