Swing Pricing

The purchase and sale of securities in a fund portfolio incurs trading costs such as brokerage fees, transaction charges, taxes and spread effects.

Spread effects occur as the fund net asset value (NAV) is calculated using mid or last-traded price while the investment manager buys underlying securities at offer and sells at bid price.

Investors buying into an actively managed fund may expect to suffer dilution caused by the investment manager’s trading activities in pursuit of the investment objectives contained within the fund prospectus.

Investors should not however expect to suffer dilution caused by the investment manager’s trading activity influenced by other shareholders trading into or out of the fund.

The objective of swing pricing is to protect existing investors from the dilution of value caused by trading costs resulting from subscription and redemption activity on the fund.

When adopting swing pricing, there are 2 possible approaches: “Full Swing” and “Partial or Semi-Swing”.

Under full swing pricing, the NAV is adjusted (swung) every dealing date, regardless of the amount of shareholder activity.

Under semi-swing pricing, the daily shareholder activity is compared to a predetermined swing threshold. The objective being to only swing the NAV if the resulting trading costs are deemed material. Under this model, it is assumed that small amounts of shareholder activity on a fund will not result in material transaction costs and that this can be covered by existing cash balances held within the fund.

As such, under semi-swing pricing protection will only activate over a certain level of net shareholder activity (i.e. all shareholder deals in aggregate), assessed as a percentage of the fund’s net assets.

When swing pricing is triggered, the NAV per share is “swung” up or down by a basis point amount to create a notional bid or offer price, ensuring that trading costs are borne by the subscribing or redeeming investor rather than existing shareholders in the fund.

Swing pricing is a widely accepted anti-dilution standard used on Luxembourg domiciled funds. The Association of the Luxembourg Fund Industry (“ALFI”) has published two best practice brochures on the subject in 2006 and 2011.

For semi-swing, daily net shareholder activity is assessed as a percentage of the fund net assets. If this activity exceeds the pre-defined threshold, the mechanism is applied at the fund level. When applied, all share classes within a fund swing in the same direction and by the same percentage. This replicates the dilution impact, as each share class suffers dilution in proportion due to the costs of trading which occurs at the portfolio level.

On the occasion where the percentage threshold is breached, the fund is valued as on any normal business day, in compliance with the stated valuation policies in the fund’s prospectus.

For full swing, there is no threshold; the fund will swing as long as there is shareholder activity on that day.

A basis point adjustment, known as the swing factor, is then applied to adjust the NAV per share up where there are net inflows, or down in the case where there are net outflows. The swing factor is an estimate of the “costs” of trading taking into account spreads, transactions costs and relevant taxes.

The simple example below demonstrates how the NAV per share would be adjusted based on whether there are 1) no material flows; 2) material inflows; or 3) material outflows.

For the purposes of this semi-swing example, assume that the NAV per share is $10 and the swing factor adjustment is 50 basis points (bps):

1. No material flows above swing threshold:
   • No adjustment to the NAV per share
   • Publish a NAV per share of $10.00
2. Material net inflows exceed swing threshold:
   • NAV per share swings up by 50bps
   • Publish a NAV per share of $10.05
   • The shareholder trading on the day receives less shares in issue for their monetary investment to compensate existing shareholders for the dilution incurred on the fund
3. Material net outflows exceed swing threshold:
   • NAV per share swings down by 50bps
   • Publish a NAV per share of $9.95
   • The redeeming shareholder receives fewer proceeds for their shares in issue to compensate the existing shareholders for the dilution being caused.

In practice investors will not know when the NAV per share has been swung. If invoked, the swing adjustment will be included in the published NAV for the day. Investors will continue to receive one published NAV per share each day that may (or may not) have been swung. All investors, whether buying or selling, will deal on this price. No disclosure will be made as to whether the NAV for the day is swung or unswung.

In the case of semi-swing, the threshold will be determined and reviewed by a swing pricing governance committee. In doing so, Management are cognisant of the objective to protect existing shareholders from the dilution effects of material shareholder dealing. The committee will therefore set the threshold at a level that will achieve the protection for shareholders while at the same time minimising NAV volatility by ensuring that the NAV per share does not swing where the dilution impact on the fund would be of a level considered so immaterial to existing shareholders.
For a fund applying full swing, the threshold does not apply, meaning that any level of shareholder activity on a given day will trigger the swing event, regardless of its size in relation to the fund’s Total Net Assets.

Franklin Templeton Investments will not disclose the swing thresholds as this may encourage some clients to deal below the threshold level undermining the ability of the mechanism to mitigate dilution. This confidentiality policy is consistent with current ALFI guidance and best market practices adopted by other promoters in the market.

The amount by which the NAV is adjusted will vary depending on the type of fund, for example a frontier market equity fund will likely have a higher swing factor than a US debt fund given the higher spreads and costs associated with buying and selling securities in these particular markets.

Franklin Templeton Investments’ policy is to re-calculate the factors on at least a quarterly basis. The policy also provides the governance committee with the authority to enable factors to be updated more frequently, for example, if there is deemed to have been a particular systemic market event during the period that has caused spreads or transaction costs to change materially. The governance committee will also oversee the calculation of the swing factors.

Swing factors are not published; however, upon request information can be communicated on an ad hoc basis to investors for a specific valuation day.

Additionally, depending on the product, the swing factor can be capped. If this is the case, the maximum swing adjustment will be specified in the prospectus.

No. Swing pricing is not a charge levied on the fund or investors. It is a tool that ensures that existing investors in the fund do not bear the trading costs associated with the portfolio manager having to trade due to the material activity of other shareholders into and out of the fund. Essentially, it is apportioning costs of trading to the shareholders that cause them.

Switches between sub-funds could be subject to swing pricing if one or both of the sub-funds NAV’s are adjusted on that particular day. This should be considered no different to any subscription or redemption as the investment manager on the exiting or entry fund will still have to incur costs in the case of material inflows/outflows.

Market level fair valuation will take place as part of the established policy of valuing securities whose valuations may be impacted between the time of market close and the time of the NAV valuation. The swing pricing adjustment does not form part of the portfolio valuation. If activated, the swing pricing adjustment is applied after the NAV valuation is completed, whether market level fair valuation has been applied or not. The concepts are separate.

Swing Pricing was first implemented on the Luxembourg SICAV range in October 2013. Additional products in different jurisdictions have since adopted either full or partial swing pricing. To find out if your investment product is subject to swing pricing, please refer to the prospectus. This will be generally indicated under a section titled “Swing Pricing Adjustment” or “Dilution Adjustment”. For products adopting swing pricing, the prospectus will always be updated ahead of that switch, and in some cases, a notice will be sent to existing shareholders to inform them of the upcoming change

For further information please review the relevant section of your investment’s prospectus or contact your local Franklin Templeton representative.