Share classes and conversions

Okay, so you know your inc from your acc. But do you know your retail from your institutional? Your dirty from your discounted? Your clean from your super-clean?

I am, of course, talking about fund share classes. The hottest topic at dinner parties across the land.

Where did they all come from? What do they do? Does it even matter?

Let’s start with the basics and work up.

The basics

An investment fund may have many share classes or unit types. Each share class will be invested in the same assets but may vary by:

• Whether dividends are paid out in cash (inc, for income) or accumulated in the unit price (acc)
• The level of fees – initial and ongoing
• The trading or hedging currency

Note, we’re only talking about investment fund share classes. Listed companies can also have varying share classes, but that’s a different kettle of fish.

An investment platform may only allow you to invest in a subset of the available share classes. For instance, you’ll usually only get one trading and (if applicable) hedging currency. It should be clear from the fund name which one you are investing in.

Next some examples. (Share class data is from Trustnet.)

Vanguard LifeStrategy 60%

This perennial Monevator favourite is admirably straightforward. Just two share classes – one inc and one acc – and no fee variation:

Name	Ongoing Cost
Vanguard LifeStrategy 60% Equity A Shares Acc	0.20%
Vanguard LifeStrategy 60% Equity A Shares Inc	0.20%

Rathbone Global Opportunties

Less relevant to your average passive investor but a popular fund nonetheless, Rathbones Global Opportunities also has just two share classes. But this time the difference is in the fees:

Name	Ongoing Cost
Rathbone Global Opportunities Fund I Acc GBP	0.77%
Rathbone Global Opportunities Fund S Acc GBP	0.51%

An investment platform will typically only support one of these share classes, but not necessarily the same one as other platforms:

Platform	Share Class
Hargreaves Lansdown	S
Interactive Investor	I and S
Scottish Widows (née iWeb)	I
Fidelity	S
AJ Bell	I

iShares Environment & Low Carbon Tilt Real Estate Index

This last example is a constituent of the Monevator Slow and Steady portfolio. It really is a smorgasbord (as Ms Reeves would say):

Name	Ongoing Cost
iShares E&LC Tilt Real Estate Index H Acc	0.17%
iShares E&LC Tilt Real Estate Index S Inc	0.11%
iShares E&LC Tilt Real Estate Index X Inc	0.02%
iShares E&LC Tilt Real Estate Index L Acc	0.22%
iShares E&LC Tilt Real Estate Index H Inc	0.17%
iShares E&LC Tilt Real Estate Index S Acc	0.11%
iShares E&LC Tilt Real Estate Index X Acc	0.01%
iShares E&LC Tilt Real Estate Index D Inc	0.17%
iShares E&LC Tilt Real Estate Index D Acc	0.17%

Again, different platforms support different share classes, sometimes for seemingly arbitrary reasons:

Platform	Share Class
Hargreaves Lansdown	S
Interactive Investor	D
Scottish Widows (née iWeb)	D and H
Fidelity	D and H
AJ Bell	D

Classes D and H vary only by the initial charge – it’s usually waived by the platforms, so it won’t make any difference in practice.

A brief history of share classes

Back in the ‘good old days’, adviser commission was usually bundled in the cost of a fund for retail investors. Thus, annual fund fees were often around 1.5%, with half going to the adviser or, if you didn’t have an adviser, just swallowed by the fund provider along with its own cut.

If you were lucky and invested via one of the then-emerging fund supermarkets or platforms, you could get a cash kickback – effectively giving you back a portion of your own money.

Good times!

Then, at the end of 2012, legislation known as RDR came along and spoiled the fun. Bundled adviser fees and cash kickbacks to platforms were banned. The old retail or bundled (aka ‘dirty’) share classes were phased out. Individual investors were given access to the institutional class – or ‘clean’, as it was free of commission.

But some platforms (notably Hargreaves) still wanted to negotiate a discount on fund fees.

In response, as well as the clean share class, fund providers started launching discounted, or ‘super-clean’ share classes, with a few basis points shaved off the fees.

Where will it all end?

In the years after RDR, the number of share classes ballooned as different platforms secured different deals.

Over time though, things have begun to simplify again. The old retail share classes have disappeared. The discount levels have narrowed.

Terms like bundled, clean, and super-clean are all pretty much meaningless now. Just relics of history.

Maybe we’ll eventually end up with the Vanguard model, with just a pair of inc/acc share classes and one level of fees for everyone.

But for now you may need to navigate multiple options, and slog though the fund details for more info.

So which one do I want?

First, decide between inc or acc. That is, do you want some regular cash income or would you prefer to keep it all rolled up in your growing investment?

(Consider the tax complications outside of ISAs and SIPPs before making your mind up).

With that, you’re probably done. Your platform will usually offer only one fee level, one trading currency, and one hedging currency, if any, for your chosen share class.

If you do see multiple fee levels then obviously you want the cheapest. But in many cases, even where platforms support multiple share classes, they will steer new investors into the cheapest one anyway.

Stuck in an expensive class?

Sometimes you’re not quite so lucky.

In the Rathbone example above, you’ll see that Interactive Investor supports both the I and the S class. This is probably because it initially supported the more expensive I class, but later successfully haggled with Rathbones to get access to the cheaper S class.

While new investors are now funnelled into the cheaper S class, old investors are left languishing in I with the extra fees.

If you’re such an existing investor, then what you need is a conversion.

Conversions

A conversion is a transaction that converts a holding in one share class to another share class in the same fund.

A conversion is not a switch. The change from one class to another happens at a single point in time. The holding is not sold and then invested again.

This distinction matters. A switch means you may be out of the market for a short time and subject to the vagaries of swing pricing (where dealing costs could move the price against you). With a switch, it would be easy to lose more from adverse price swings than you’d ever save in lower fees.

A conversion does not present these risks.

A conversion will also not trigger any capital gain. Neither should a switch as long as the underlying fund is the same, although it may result in some confusion, for instance on book costs and equalisation (as raised in the comments to my article on transfers.)

Why don’t we just convert then?

Because your platform probably won’t let you.

I don’t know of any mainstream investment platform that enables an investor to convert an existing holding (even though they can process conversions, as we will see shortly).

The last time I tried calling my platform to request a conversion, the administrator patiently explained to me what a switch was, as if talking to a small child. I got nowhere trying to explain the difference.

Perhaps, as the number of share classes continue to be rationalised, this problem will become rarer. But as a cost-obsessive Monevator reader, it’s irritating if you’re the unlucky one who gets stuck with unnecessary extra fees.

The transfer problem

Imagine you had a holding in the iShares real estate fund above at Interactive Investor (in the D class) and you want to transfer in-specie to Hargreaves Lansdown (which only supports S).

You can’t simply re-register the units across as you would if it was the same share class. You need someone to do a conversion.

It is ironic that, whilst RDR forced platforms to support in-specie transfers, it also prompted a flourishing of different share classes that made many in-specie transfers impossible.

This problem required more rule changes from the FCA (Making Transfers Simpler, introduced in 2019) to fix the problems created by the earlier policy.

Platforms must now convert share classes where necessary to complete an in-specie transfer and then move the investor to their cheapest share class.

So today you generally don’t need to worry about share classes when transferring. Either the old platform will convert before transfer, or the new platform will convert afterwards – or both.

A convoluted conversion

It’s frustrating. Platforms can process conversions but choose only to do so for transfers where the regulations insist on it.

However more cunning readers may have already spotted a decidedly convoluted workaround.

If, in a situation like the Rathbones example above, your platform won’t convert your holding to a newer, cheaper share class, then one option is to transfer your account elsewhere and then transfer it back again.

The FCA rules mean that by the time you get your investment back where it started, one of the platforms involved should have converted you to the cheaper class.

I’ve never done this, but I see no reason why it wouldn’t work in theory. In practice, it may well turn out to be too much of an admin headache.

So what?

Maybe you’ve never needed to think about share classes. And maybe you never will. (I know, I waited right until the end to admit it!)

You’ll probably:

• Only need to choose between inc and acc
• Never be given a choice of currencies or fee levels
• Never have to worry about transfers
• Be happy with the share class you’re given

But it’s just possible that you may get stuck in an expensive share class, or have a transfer go awry with share class mismatches. If you do hit a problem then you may not get much sense from your platform helpline – and knowing your share class onions might just help.

Ever been stuck in an expensive share class? Know of any platforms that will process a conversion for you? Ever tried the transfer dodge?! Let us know in the comments below.

Oh – and that bit about share classes and dinner parties? Not true. Don’t try it. Really.