Swinging Single Pricing
An explanation
Why operate a single swinging price?
When a mutual fund experiences inflows or outflows,
a manager may be forced to buy or sell the underlying
investments in the fund and incur transaction costs
in the process. If left unaddressed, these costs
would have to be borne by the existing investors
in the fund. To ensure ‘long-term’ investors are not
materially disadvantaged by the negative impact
from redemptions and subscriptions (an effect known
as dilution) we operate a swinging single pricing
mechanism across our range of UK mutual funds
and SICAVs. The swinging single pricing mechanism
is a fair and flexible method for dealing with
dilution issues that arise when a single priced fund
experiences large inflows or outflows.
How does swinging single
pricing work?
The net asset value (NAV) of a fund is dictated by the
latest mid-market prices of the underlying securities.
Under a single swinging price regime, when the fund
experiences net redemptions or subscriptions the
price may swing to negate the impact of the expected
transaction costs incurred, if deemed significant. In
practice, net outflows mean the price swings down
while net inflows mean it swings up. The scale of the
swing is determined by the total of the transaction
costs. However, regardless of which way the price
swings and by how much, all investors buy and sell
at the same price. It should be stressed that the
swinging single pricing mechanism is not a charge and
does not benefit the manager of the fund.
How we price our funds
Our funds are assigned what is known as a ‘long-term’
pricing basis. The purpose of this is to reflect the
general trend of monetary flows over the previous 1,
3, 6 and 12 months. When deciding on what basis to
assign, we take into account recent trends and shortterm expectations, as well as input from our sales
teams. We try to ensure that existing investors are
not adversely affected by the unexpected short-term
activity of other investors by swinging away from the
long-term basis. The fund’s bases are reviewed every
month to ensure they are appropriate.
For funds experiencing net inflows, we calculate the
fund value based on the prices at which it would cost
to buy a new slice of the current assets in the fund,
allowing for any costs or taxes associated with the
purchase. These funds will normally be on an offer
pricing basis. For funds predominantly experiencing
outflows, we calculate the fund value based on the
selling prices for these assets, with allowances for any
associated costs. These funds will normally be priced
on a bid basis. For funds without consistent trends, a
mid-basis or net asset value (excluding any transaction
costs) basis is normally deemed appropriate.
Funds investing in asset classes with high transaction
charges, such as real estate, will have a larger
difference between the bid and offer basis (the
‘spread’). For instance, while the typical spread for an
equity fund will be between 0.2 and 1.2% (depending
on its geographical jurisdiction), the spread for a real
estate fund can be as high as 7% or even higher in
exceptional circumstances.
What investors should expect
Investors should expect to enter a fund on an
offer basis and leave on a bid basis, but they may
transact on a more favourable basis depending
on what other transactions take place on the day.
If significant transactions occur, we may choose to
move the pricing basis away from the long-term basis
on that day to make sure that we treat all investors
fairly. Our aim is to ensure the investors who generate
transaction costs leave the fund in a neutral position
for existing investors.
The effect of dilution –
a worked example
¬ Imagine a fund has 10,000,000 shares in
existence with a current price of 100 cents
per share.
¬ A new client wants to invest €250,000, requiring
the creation of 250,000 new shares in the fund.
¬ The dealing cost of creating the new 250,000
shares is €2,500 (i.e. 1% of the mid–market value
of the shares bought).
¬ If the share price is not adjusted for dilution,
then the NAV rises to €10,247,500, but there
are now 10,250,000 shares in existence so, at the
single mid-market price, each share is worth only
99.976 cents.
¬ As a result of the deal, the value of the fund would
have been diluted by 0.024%.
¬ Over time, for funds growing or contracting
significantly, particularly if the fund is investing
in assets with wide spreads (such as smaller
companies, emerging markets or property), the
effect on performance can be substantial.
Conclusion
We are confident that the operation of a swinging single pricing regime for the funds we manage
is in the best interests of our clients and helps ensure that, where possible, the impact from the
dealing activity of other investors is limited.
How dilution adjustment works
Costs of dealing.
Comes out of the funds
Price adjustment for retail
or institutional share class
Offer price for fund
Fund manager
buying assets
Investors buying
fund units
Broker commission
taxes and stamp duty
Market makers spread
on buying
Sample
mid-market
position
Fund Price adjusted
to take account of
dilution.
Market makers spread
on selling
Fund manager
selling assets
Broker commission
and taxes
The fund price
may be adjusted
to take account of
dilution depending
on whether there
are net inflows or
outflows of cash
during a given
dealing day.
Only one price
will be quoted.
Investors selling
fund units
Bid price for fund
If you require further information, please speak to your usual contact at Standard Life Investments,
or visit our website.
Visit us online
standardlifeinvestments.com
Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is
authorised and regulated in the UK by the Financial Conduct Authority.
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Standard Life Investments Limited (ABN 36 142 665 227) is incorporated in Scotland (No. SC123321) and is exempt from the requirement to hold an
Australian financial services licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the ‘Act’) in respect of the provision of financial
services as defined in Schedule A of the relief instrument no.10/0264 dated 9 April 2010 issued to Standard Life Investments Limited by the Australian
Securities and Investments Commission. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act.
Standard Life Investments Limited is authorised and regulated in the United Kingdom by the Financial Conduct Authority under the laws of the United
Kingdom, which differ from Australian laws.
Standard Life Investments Limited, a company registered in Ireland (904256) 90 St Stephen’s Green Dublin 2 and is authorised and regulated in the UK by
the Financial Conduct Authority.
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