SWING PRICE

Type of funds as per pricing

Funds may be either single price funds or dual price funds. Dual price funds publish two NAV's one for subscription and another for redemption. Since single price have only one NAV, so huge incoming subscriptions or redemptions can impact exixting unit holders NAV if transaction cost is charged to fund.

Introducing swing pricing

When an investor buys or sells shares in an investment fund, the fund incurs dealing costs. Absent a mechanism protecting the interests of other shareholders, these costs are shared across all of the fund’s shareholders. As a result, the activity of one shareholder can be to the detriment of other investors in the fund. Swing pricing is a technique designed to reduce the negative impact of subscriptions and redemptions on “non-trading” investors in a fund. This approach to pricing is being used by a growing number of fund managers.

How does swing pricing work?

Conceptually, in some respects swing pricing is similar to dual-priced funds that require investors to deal on a bid-offer basis, except that swing pricing is used for single-priced funds. With swing pricing, a single price is issued, and all clients buy and sell at this price. To calculate the dealing price, the funds’ administrator calculates the net asset value (NAV) for the fund before consideration of capital activity – subscriptions and redemptions – and then adjusts (“swings”) the NAV by a pre-determined amount. The direction of the swing depends on whether the fund is experiencing net inflows or net outflows on the dealing day, while the magnitude of the swing is based on pre-determined estimates of the average trading costs in the asset class.

• If the fund is experiencing net inflows, the NAV is adjusted upwards.

• If the day’s dealings generate a net outflow, the NAV is adjusted downwards.

These adjustments serve to insulate non-dealing shareholders from the trading costs triggered by the dealing shareholders. Swing pricing can be used on either a full or partial basis. With full swinging, the

price swings every day regardless of the size of the net capital flows. With partial swinging, the price swings only if the net capital flows exceed a pre-determined threshold.

Implications of swing pricing for investors

One of the key principles of swing pricing is that any investor transacting at a volume that would materially impact other fund investors should bear the costs of their trading. The nature of the partial swing pricing mechanism, however, means that if the net trading in the fund does not meet the threshold of materiality, no swing occurs as trading costs do not have a material impact on other shareholders.

The mechanics: determining swing magnitude and thresholds

The extent to which prices are swung depends on the costs of trading in the particular asset class. To determine the extent of price swing for a particular fund, investment team calculates a swing adjustment factor based on broker commissions, taxes and other trading-related charges, and foreign exchange costs where relevant. The investment team then makes a recommendation to Pricing Committee, who makes the final determination. The Committee also sets the threshold of net subscriptions or redemptions which will trigger price swinging. Swing adjustment factors and thresholds are reviewed on a regular basis. Common with industry best practice to reduce the chance that some investors may try to “game” their trading activity in the funds, it is not our intention to notify investors in advance if the thresholds or swing factors change. However, details are available on request.

Other implications of swing pricing

Investors should be aware of the impact of price swinging on a number of aspects of a fund’s administration and performance:

• Performance is measured and reported using swung prices. Since it is possible that prices could have swung on either or both the initial or ending date over a period in which performance is being measured, it is possible that the returns of the fund are influenced by trading activity in the fund, as well as the

performance of the fund’s investments.

• Price swinging can increase the variability of the fund’s returns, causing the fund to appear to have slightly higher risk levels than would be expected based on the underlying holdings. However, as price swinging benefits a fund’s long term investors, best practice is to measure performance based on the swung

price.

• Performance-related fees are not based on swung prices. Performance fees are intended to remunerate managers based on the success of their investment decisions, and should not be influenced by fund investors’ transaction activity. Also, as performance fees are crystallised on specific

dates, if the fee was based on a swung price the amount of the fee could be materially distorted. Therefore, performance fees are calculated using unswung (and un-published) prices. This process is, of course, monitored carefully by the funds’ auditors.