Swing Pricing. Update survey

Transcription

1 Swing Pricing Update 2015 survey

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3 table of contents Part I - The Principles of Swing Pricing p.4 Swing pricing and dilution p.4 Forms p.4 Governance and disclosure p.5 Part II - The 2015 Swing Pricing Industry Survey p.6 Introduction and executive summary p.6 Target audience for the survey p.7 Swing pricing as an anti-dilution practice p.8 Full or partial swing pricing? p.9 Swing factors and thresholds p.10 Governance p.13 Financial reporting and performance measurement p.16 Operational considerations p.16 Correction policy p.17 What percentage of your firm s Luxembourg AUM is subject to swing pricing? p.18 Other anti-dilution practices p.18 Investor considerations p.18 The application of swing pricing in other domiciles p.19 Conclusion p.20 For a full list of definitions of terms used in this publication please refer to the ALFI Swing Pricing guidelines which can be found at the ALFI website 3

4 part I - the principles of swing pricing Swing pricing and dilution Investors in an actively managed fund may reasonably expect to incur costs caused by the investment manager s trading activities in pursuit of the investment objectives outlined in the fund prospectus. They would not reasonably expect to suffer a reduction in shareholder value influenced by other shareholders trading into or out of the fund. Dilution is the reduction in the value of a fund, and hence the net asset value ( NAV ) per share, that occurs as a result of shareholder capital activity dealt at a NAV that does not mitigate against the costs of investment associated with security trades undertaken by the investment manager. Dilution occurs because mutual fund share classes in Luxembourg are single-priced (typically midpriced) without dealing charges, whereas the portfolio manager incurs cost leakage due to: Buying securities at a higher offer-price; Selling securities at a lower bid-price; Explicit transaction costs including brokerage fees, commissions and taxes; Market impacts as a result of purchasing or selling down securities due to the effects on the supply and demand curves of those securities in the market. The purpose of swing pricing is to provide reasonable protection to existing shareholders in a fund against the negative dilution impact occurring when a fund invests/disinvests in securities or markets as a result of shareholder activity. This is achieved by transferring the estimated impact arising to those shareholders transacting. Forms Swing pricing has two distinct forms: First, the full swing method, whereby the NAV adjusts up or down every NAV calculation day based on the direction of net capital activity regardless of the size of shareholder dealing; Second, the partial swing method that is only invoked when the net capital activity is greater than a pre-determined threshold (often referred to as the swing threshold ). This threshold is commonly set in percentage or basis point terms but can also be based on an absolute monetary value, or both a percentage and monetary amount. Determination of which method, and the level of threshold, to apply will differ by asset manager depending on factors such as market conditions, volumes of shareholder activity, size of fund and how much cash is normally held. The level of adjustment that should be made to the NAV is called the swing factor. This adjustment must consider the components that cause dilution and come up with a reasonable proxy adjustment incorporating some or all spread effects, transaction costs and potential market impacts. If swing pricing is applied, all share classes of a fund swing in the same direction (and typically by the same basis point amount), as dilution occurs at the fund level rather than at the share class level. Most asset managers would also apply a cap on the level of factor applied. 4

5 How is swing pricing applied? The simple example below demonstrates how the NAV per share would be adjusted based on a partial swing pricing method where there are 1) no material flows; 2) material net inflows; or 3) material net outflows. For the purposes of the example, assume that the NAV per share is $100 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 USD Material net inflows (subscriptions) exceed swing threshold: NAV per share swings up by 50bps; Publish a NAV per share of USD ; The subscribing shareholders trading on the day receive fewer shares for their monetary investment to compensate existing shareholders for the dilution incurred on the fund. 3. Material net outflows (redemptions) exceed swing threshold: NAV per share swings down by 50bps; Publish a NAV per share of USD 99.50; The redeeming shareholders trading on the day receive a lower monetary amount for their shares to compensate the existing shareholders for the dilution caused. In a full swing pricing model, the fund swings every day and so only items 2 & 3 are applicable. Governance and disclosure In practice, investors will most likely 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. It is advisable for asset managers to create a swing pricing policy document which describes the characteristics and parameters of their model. This policy document would typically be approved by the fund board, management company board or specifically appointed swing pricing management committee empowered to perform oversight of the swing pricing process. Historically there was a reluctance to publish any of the data, swing factor and swing threshold information, as it was deemed proprietary information. In recent years, it has been observed that attitudes have relaxed towards making some of these components publicly available. 5

6 part II - the 2015 swing pricing industry survey Introduction and executive summary In 2015, swing pricing remains one of the most commonly discussed topics within the Luxembourg fund industry and increasingly in other jurisdictions. Since the formation of the original ALFI working group in 2006, the theory and practice has continued to evolve and be debated by market participants from across the asset management sector. Ultimately the goal was then, and remains today, to protect investors against the effects of dilution. This has led to a number of other jurisdictions considering or permitting the use of swing pricing within their domestic markets such as France in More recently, industry participants in the United States have been debating whether it could be used as an effective dilution and liquidity management tool. This has led the SEC to issue a consultation proposal to amend the Investment Company Act to allow swing pricing 2. As a result of greater industry analysis and increased international focus, the Association of the Luxembourg Fund Industry (ALFI) reconvened a swing pricing working group ( The Working Group ) in the summer of 2015, consisting of ALFI members across a broad range of disciplines including asset managers, fund auditors, legal firms and third party administrators. The Working Group was keen to: 1. Launch a new broader survey in comparison to the 2011 version of the ALFI Swing Pricing Survey in order to understand how different asset managers within Luxembourg are using the mechanism today and how this has developed from the environment witnessed in Update the ALFI Swing Pricing Guidelines to provide updated guidance on best practices and trends in the industry. The 2015 version of the ALFI Swing Pricing Industry Survey ( the survey ) builds on the results gathered in 2011 and provides more detailed in- sights into how swing pricing is currently applied by asset managers, common trends, emerging themes and the challenges the industry faces in this regard. The trend observed in 2011 towards greater adoption of swing pricing in the industry has continued. We observed both a greater number of participants responding to the survey and a greater number of asset managers that have implemented the mechanism. Those asset managers who have been proponents of swing pricing for several years continue to develop traditional theory in areas such as the causes of dilution, the conditions for applying the mechanism and investor disclosure. At the other end of the spectrum, there remain asset managers that have evaluated swing pricing, but decided not to introduce it on their product ranges, due to a bias towards a home market that does not allow for it on domestic ranges, or have simply taken a view that their investor base would not accept it at this moment in time. Half of the sample population who responded but were not applying swing pricing stated they were in the process of evaluating it, and wanted to understand more about the key principles, drivers and theories. As in 2011, the 2015 survey was designed to extract headline information and trends, providing the working group with sufficient data to identify where further guidance was necessary. The result was that the survey responses can be broken down into several thematic categories as follows: Swing factors and thresholds; Swing factor caps; Swing factor components; Threshold ranges; Disclosure; Frequency of review; Governance; Financial reporting and performance measurement SEC announce proposals to amend the Investment Company Act to permit swing pricing September 22,

7 Target audience for the survey Responses were received as follows: ALFI Swing Pricing Survey AUM in USD trillion % of Lux Fund Industry Total Luxembourg assets under management USD % Total assets under management of survey USD % respondents Total assets under management of respondents using swing pricing USD % Survey audience and respondents Application of swing pricing No. of respondents Target audience The respondents who apply swing pricing break down as follows in terms of cultural origin. Assets under management in percent by number of survey respondents Break down of respondents who apply swing pricing 16% / 4 4% / 3 38% / 7 9% / 3 15% / 7 18% / 6 USA Switzerland UK France Nordic Other 7

8 part II - the 2015 swing pricing industry survey The following target audience information was noted: Of the responses received there is a strong bias by asset managers of US, UK, French, and Swiss origin to apply swing pricing. Conversely asset managers of Belgian, German and Italian origin tend not to apply swing pricing (for the latter two this situation is consistent with the pattern observed in 2011); 3 Of the 15 asset managers that do not apply swing pricing, seven confirmed they are currently considering implementing it, while four stated that they have included the permission within the prospectus, even though they are not actively operating it. Swing pricing as an anti-dilution practice Approximately two-thirds of asset managers have been practising swing pricing for five years or more (of which 17% have been practising for longer than ten years). The breakdown by country of origin is as follows: Number of years swing pricing has been applied by number of respondents by cultural origin More than 10 years Between 5 and 10 years Between 1 and 5 years Less than 1 year USA Switzerland UK France Nordic Other Asset managers are applying swing pricing to a varied range of fund types and asset classes. The vast majority of respondents are applying on equity, fixed income and multi-asset funds however it is also being applied on other asset classes such as shariah funds and fund of funds. A significant proportion of respondents are applying it on alternative products. Money market funds are normally excluded from swing pricing due to de minimis levels of dilution however some asset managers do apply it. All respondents apply swing pricing on UCITS fund ranges (UCITS constitutes 84% of the overall Luxembourg industry AUM 4 ) and only 37% apply it to Alternative Investment Funds (AIF). 3 According to the ALFI statistics from July 2015, the top five fund initiators by country of origin in Luxembourg in terms of AUM are: USA (21. 9%), UK (16.6%), Germany (14.7%), Switzerland (14.2%) and Italy (8.4%). 4 Derived from EFAMA 2015 Q2 statistics 8

9 Fund types on which swing pricing is applied Fund types on which swing pricing is applied 100% 80% 60% 40% 20% 0% No. of respondents applying % of respondents applying The survey also sought to understand reasons why swing pricing was not applied to some or all of the practitioners fund ranges. The main driver mentioned was the practicality of applying swing pricing to certain asset classes and product types as well as the costs and benefits of doing so. Other respondents confirmed that they had concluded it was not worth introducing it based on back-testing of historical shareholder flows, or that they applied redemption fees. Full or partial swing pricing? The overwhelming majority of respondents who apply swing pricing use the partial method (97%), either exclusively or in addition to the full swing pricing method. The main reason stated for using partial swing was to prevent the NAV volatility created by full swing - consistent with the comments received in Another commonly stated reason was targeting material dilution in situations where cash levels are held to manage smaller redemption flows. One asset manager, to complement the classical partial swing method, employs a variation whereby a swung NAV is applied if shareholder flows are below the threshold but trending in the same direction over a number of days (e.g. if a constant redemption pattern was witnessed several days in succession). Similar to the observation in 2011, the majority of asset managers practising full swing pricing are Swiss (71%), presumably as a result of this being the only model permitted in the Swiss domestic market. One Swiss asset manager uses full swing pricing exclusively. Other observations were: 80% of asset managers who operate swing pricing use a pre-determined swing factor to apply the swing adjustment; 7% use a method which values the portfolio at bid or offer prices (depending on the direction of shareholder flows), and add actual transaction costs incurred; 13% differentiate which method they use by product type, suggesting a high degree of customisation in applying swing pricing. 9

10 part II - the 2015 swing pricing industry survey Swing factors and thresholds The survey sought to investigate in greater detail the developments in the industry with regards to: The components of swing factors; Disclosure of factors and thresholds; Other industry trends. Swing factor caps and components When considering the constituent components of swing factors, all asset managers calculate these based on a combination of bid-offer spread impacts, transaction costs and transaction taxes associated with purchasing or selling portfolio investments: 80% of the sample population that apply swing pricing use all three components in their factors; Three asset managers (10%) include market impact costs in their swing factors. This topic is a recurring theme in the comments section of the survey, and several respondents raised interest in understanding more about how these costs might be incorporated into the calculation this point will be further addressed in the guidelines; Five respondents exclude transaction taxes, while another asset manager excludes explicit transaction costs in their calculation. Swing factor components 10% 7% 10% 7% 97% 97% 93% 93% Transaction costs (brokerage commissions, currency costs, settlement fees) Weekly Transaction taxes Monthly Quarterly Bid-offer spreads Monthly & Quarterly Bi-Annually Market impact Other costs Other 80% 80% There is a relatively even split between the fund administrator 5 and the management company as to who calculates the swing factor. Several respondents see it as a joint function. Two respondents mentioned that they use a third party vendor to calculate factors. 5 NB: Several asset managers responding to the survey perform administration services in-house. 10

11 Swing factor cap rates 60% 53% 50% 40% 47% 43% 30% 20% 10% 0% 7% 7% 0% 3% 0% 13% Equities Fixed Income Money Market Funds 3% 0% 0% Multi Asset Funds 1% cap 2% cap 3% cap Approximately half of respondents cap the level of the swing factor applied on certain asset classes, with equity, fixed income and multi-asset funds most commonly capped at 2%. This is in line with the 2011 survey. Swing threshold ranges The working group was keen to understand how swing threshold application had changed over the four years since the initial survey. The range of responses can be seen in the table below: Threshold ranges Number of respondents setting the specific threshold range This shows that the most commonly applied threshold is 1% or less, with over half of all responses at threshold intervals of 3% or less. The population diminishes significantly over the 5% level. 11

12 part II - the 2015 swing pricing industry survey Do you differentiate thresholds? 8% 3% No, apply no threshold 28% No, apply same threshold across all funds 28% Yes, apply different threshold level by fund investment objective Yes, apply different threshold level by fund size Yes, thresholds are specific to each fund individually Other 11% 22% Ten respondents apply a single threshold across all products, while 19 differentiate thresholds by fund, with a clear bias to differentiating specific to each individual fund or asset class. Disclosure Overall, a willingness to be more open on swing factor disclosure has evolved over the last few years - in the previous survey only three out of 19 respondents were willing to disclose swing factor and threshold information. Almost half of respondents now choose to disclose swing factor information upon client request, however a similar number continue to not disclose these details. Most asset managers still prefer not to disclose swing factor information in formal fund documentation as it can quickly become stale with only one respondent disclosing this in the annual report, and one other publishing it in the prospectus. Three asset managers disclose details on their corporate website. In terms of the NAV publication process: There was an almost unanimous response that only one NAV was published (whether swing pricing was applied or not; one asset manager stated they disclosed both swung and unswung NAV for their Institutional fund range); Only two asset managers indicated that they would disclose whether the NAV was swung or not on the day of publication; 30% stated they had a process to tell investors retrospectively whether the NAV had swung or not. Only four out of 29 asset managers (14%) practising partial swing pricing disclose swing thresholds. All four stated that these were available upon request rather than openly disclosed within the fund literature. It appears that the majority of asset managers do not disclose thresholds to avoid investors attempting to arbitrage and trade under the threshold over a number of days. This is consistent with the pattern in the 2011 survey. Frequency of review A range of approaches were observed regarding the frequency of review of swing factors. Almost half of asset managers (47%) continue to review swing factors on a quarterly basis. This contrasts with 20% who review factors only monthly, and 13% who routinely operate both a monthly and quarterly review. At the extremes, one respondent reviews factors on a weekly basis, while one asset manager even upon each NAV swing for variable swing factors. At the other end of the spectrum one asset manager performs a review every six months. The remaining 14% perform reviews on an ad-hoc basis for various reasons, such as changes in market conditions, or using proprietary methods to detect when changes are necessary. The majority of asset managers (80%) have the ability to update swing factors when required depending on prevailing market conditions. 12

13 Swing factor review frequency 13% 3% 13% 3% 20% Weekly Monthly Quarterly Monthly & Quarterly Bi-Annually Other 47% Asset managers tend to be divided between those who operate a single review cycle of their thresholds (40%) versus those who operate multiple periods of review across their fund ranges (in line with factor review) (60%). Over half of respondents stated they had the ability to perform updates depending on market conditions or other ad-hoc events in combination with a more regular review cycle. In summary there is no clear trend in terms of regular pattern of review. Asymmetric and multiple swing factors and thresholds The survey split this section to: Investigate which asset managers have different bid and offer swing factors (asymmetric factors); Understand if any respondents have developed their models to include multiple or variable factors and thresholds. Two-thirds of asset managers (67%) use asymmetric swing factors for net subscription versus redemption flows to allow for the fact that certain types of cost, such as UK Stamp Duty, are only experienced when purchasing, and not on disposal of assets. One asset manager confirmed they use multiple factors on a fund depending on size of flow, while a further respondent stated they are evaluating multiple thresholds with tiered swing factors on their fund range with a view to implementation in the short-term. Governance The survey explored in more detail how asset managers perform swing pricing governance. In 2011, the main finding was that many had set up standalone valuation and swing pricing committees to oversee how the policy was applied and monitored. In 2015 we found that this is still the most widely used approach to managing the policy, approving factors and thresholds, and monitoring the operation of swing pricing either as a standalone governance function, or in combination with other decision-making bodies such as the fund or management company board. 70% of asset managers operate a single committee responsible for the governance of swing pricing for multiple fund ranges; 43% have a single committee that covers the application of swing pricing for funds domiciled in multiple jurisdictions. 13

14 part II - the 2015 swing pricing industry survey Body responsible for oversight and approval 70% 67% 60% 50% 40% 50% 57% 30% 27% 23% 23% 20% 17% 17% 17% 10% 0% 0% 0% Policy Factors Thresholds 3% Fund or ManCo Board Valuation / swing pricing committee Both No response On the swing pricing policy, only four of the 30 asset managers (13%) have a separate policy by fund entity. Many respondents (73%) use a single policy to govern multiple fund entities, including 30% of asset managers that have a single policy applicable across multiple fund domiciles. A key observation is that asset managers use economies of scale for multiple funds and jurisdictions, as far as market practice and regulation allow in adopting a single committee, and common policy across different funds and domiciles. Where swing pricing committees exist, they are constituted from a wide range of organisational disciplines. A large number of asset managers have participation from board members and senior management from within the organisation. Control functions such as Risk Management and Compliance are well represented. Top ten governance Top committee ten governance participants committee participants Risk Management Officer 60% Compliance Officer 50% Fund and Management Company Directors 47% Investment / Business Operations 43% Conducting Officers 43% Product Management 33% Chief Investment Officer / Portfolio Management 33% Trading Management 17% Legal Officer 13% Sales Management 13% 14

15 With respect to policy update and review, 43% of respondents stated they reviewed on an ad-hoc basis, while 30% perform an annual review, and a further 13% do both. Only two respondents routinely review their policy less frequently than annually; 22 asset managers (73%) have the responsible governance body review or approve the number of occasions swing pricing is applied; Two (7%) confirmed that this review is performed annually, and four (13%) review on an ad-hoc basis; 14 asset managers (47%) disclose to the board the dates on which swing pricing was applied, for information purposes only. Only one asset manager asked the board to formally approve, with the remainder of respondents not disclosing this information to the board. 16 asset managers (53%) stated that their fund boards review monthly or quarterly; Periodic monitoring of swing pricing effectiveness 23% 43% No periodic monitoring Monitoring of benefit retained in the fund Reconciliation of benefit to actual dilution 33% Five asset managers stated they operate a policy of monitoring investor activity to identify those investors breaking up trades over a number of days attempt to avoid swing pricing; One of these respondents stated they have discretion in their swing pricing policy to reduce the swing pricing threshold to capture consecutive days of activity by a single investor, where that trading would have breached the threshold in aggregate; 12 respondents operate a frequent trading policy separately from swing pricing, while ten asset managers stated they have no such practices in place. 15

16 part II - the 2015 swing pricing industry survey Financial reporting and performance measurement The survey included several questions dedicated to financial reporting and performance measurement practices. Out of 30 respondents only two are reporting under IFRS which limits the analysis of potential complexities IFRS may bring in respect of the operation of swing pricing and disclosures. If swing pricing is applied at year end, 47% of respondents disclose it as a note to the financial statements, while 24% choose to disclose it within the statement of net assets (17% of respondents detail the adjustment amount in a dedicated line within the financial statements). One asset manager reports it as a footnote on the face of the primary statements in the financial statements. In total 83% of respondents choose to disclose the fact that they employ swing pricing and use either of the above mentioned disclosure options, whereas only 17% of respondents stated that no disclosure is made. As regards the accounting treatment of the monetary value of swing adjustments, 63% of respondents treat the swung component of subscriptions and redemptions as an adjustment to capital, whereas 30% choose to treat the adjustment as an income or expense item. Transaction costs are for the most part, debited against the cost of the respective investment, regardless of asset class and typically disclosed in the notes to the financial statements which is consistent with the prior survey. 90% of respondents use the swung NAV for performance reporting purposes if an event occurs at the end of the reporting period. This is consistent with the general practice of calculating and disclosing only a swung NAV. Operational considerations The operational considerations section of the survey was expanded from the previous 2011 survey to include questions on: Who makes the decision to apply partial swing pricing on a day-to-day basis; Under what conditions swing pricing might be suspended; Its usefulness in a liquidity crisis; Of the 30 asset managers who responded, 13 (43%) rely on the fund administrator alone (under a standing instruction) to determine whether or not a fund should swing on a day-to-day basis and in eight cases (27%) the management company decides. The remainder rely on a mixture of the fund administrator, management company and transfer agent. A larger proportion of asset managers (37%) are now in a position to use final shareholder activity on which to base swing decisions, compared to 25% in In the 2011 survey, a small number of the 19 respondents stated that the management company reserves the right to decide whether to invoke the swing on a discretionary basis, compared to 50% in

17 Most popular reasons for suspension of swing pricing 80% 70% 60% 67% 60% 73% 60% 50% 40% 30% 20% 10% 0% Fund mergers Fund liquidation Fund launch In specie transactions In light of the discussion in the Luxembourg fund industry and abroad, the survey asked asset managers for their opinions on how useful swing pricing might be in a liquidity crisis. 13 asset managers (43%) responded that there is potential to apply swing pricing as part of a range of measures to assist with fund liquidity issues. Several of these asset managers stated that it would be the remedy of last resort in a tool kit that includes practices such as fair valuation and redemption gates. Several respondents believe that caps on swing factors limit its usefulness in the event of liquidity issues. Correction policy Asset managers were asked what they would consider to be a root cause for a material NAV error, from the misapplication of swing pricing, under CSSF Circular 02/77. The majority of responses can be clustered into the following areas: Applying the wrong swing factor; Applying the swing in the wrong direction; Applying/not applying a swing adjustment when the policy indicated the contrary; Applying swing pricing at an incorrect threshold; and Applying/not applying a swing adjustment based on capital activity at the valuation point which was subsequently found to be incorrect. A majority of respondents (67%) felt that no error occurred if the information within the confirmed capital activity led to a different decision than that made at the estimated capital activity cut off. 17

18 part II - the 2015 swing pricing industry survey What percentage of your firm s Luxembourg AUM is subject to swing pricing? Luxembourg AUM split by cultural origin of the asset manager 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% USA Switzerland UK France Nordic Other % of AUM 71-90% of AUM 51-70% of AUM 0-50% of AUM When considering the percentage of asset managers AUM in scope of swing pricing, we observed the following: Over a quarter (27%) of respondents apply swing pricing on over 90% of their Luxembourg AUM; Approximately two-thirds of asset managers (65%) apply swing pricing on at least half of their AUM. Other anti-dilution practices Asset managers use other anti-dilution remedies either in combination with or instead of swing pricing however several asset managers that applied swing pricing commented that the other remedies are permitted in their prospectus but are used very rarely in practice. This contrasted with the usage of swing pricing which was a remedy affording daily protection. Other remedies include assets-in-kind, redemption gates and anti-dilution levies. One asset manager employed redemption fees. 18

19 Investor considerations The survey considered how well swing pricing was understood and the types of questions received by asset managers from their sales and product teams and external clients. In terms of investor groups, the vast majority of responses indicated that the majority of questions tended to come from institutional clients and distributors. Stakeholder from whom questions relating to swing pricing are received 11% 11% 13% 37% Retail Investors Institutional Investors Distributors Regulators Other 27% 77% continue to receive frequent questions concerning how swing pricing is operated. 83% regularly receive questions asking what the threshold is or whether a specific deal would cause swing pricing to be invoked; 73% are regularly asked what the size of the swing factor adjustment is; 63% receive questions on whether swing pricing had been applied historically to a specific valuation date/the number of times the swing pricing mechanism had been invoked over a period of time; Asset managers also regularly received questions on whether: A swing price had been applied to a specific investor deal; Corporate events such as an in specie transaction or merger would be impacted by swing pricing; Swing pricing is included in the assessment of performance fees; The asset manager applies swing pricing on new fund ranges; Investors are able to avoid swing pricing; and Shareholder deals can be broken up to avoid swing pricing. It appears that investors continue to seek understanding of swing pricing, but moreover the specific models that asset managers operate. Aside from more basic questions on how the mechanism works, questions appear to focus on details of the parameters of asset managers policies, how often invoked and in several cases how investors can avoid the system. This emphasises the need for clear and consistent investor communication, as well as a robust governance process to ensure that swing pricing is applied consistently to all investors causing material dilution. 19

20 part II - the 2015 swing pricing industry survey The application of swing pricing in other domiciles Of the 30 respondents who confirmed they apply swing pricing, 12 are also using swing pricing on UK domiciled products, seven apply it on Irish funds, and four confirmed it is operated on Swiss products. Notably, despite being permitted in France, only one respondent stated they are applying swing pricing on their French domestic product range. This may be because the use of swing pricing being a relatively recent development in the French market and due to limited participation from French asset managers in the survey (four asset managers responded with three applying swing pricing). Summary of asset managers applying swing pricing in other fund domiciles UK 12 Ireland 7 Switzerland 4 Other 7 There are also examples of swing pricing being applied to funds domiciled in Hong Kong, Australia, the Nordic countries, the Channel Islands and the Cayman Islands. There are no asset managers applying swing pricing to German or Italian domiciled products, even by asset managers originating from those countries (four German, three Italian). Several respondents stated that this is due to regulatory restrictions. Conclusion For the 2015 survey, ALFI targeted the largest 65 asset managers exclusively, from whom 45 responses were received, representing more than double the responses received in 2011 and covering 69% of the Luxembourg market AUM. This provides a high level of comfort that the information received is representative of the industry as a whole. There have been observable developments on disclosure and governance, and it is evident from responses that many asset managers have become more open to sharing information with investors retrospectively as to whether the NAV was swung and the level of the swing factor. From the sample tested there is almost universal adoption by organisations of UK, US and Swiss origin. The main reason for lack of adoption by other asset managers appears to be linked to a bias towards home market investors, or investor understanding of the concept. The preference for partial swing remains, with all but one respondent preferring this method (as opposed to full swing) for their Luxembourg domiciled funds. A number do practice full swing pricing on some product ranges and products domiciled elsewhere, notably Swiss respondents, as full swing is a Swiss market requirement. There is divergence on how respondents determine the level of their thresholds between those that consider each fund on a case by case basis versus those who apply a consistent threshold across all products. Swing factor construction seems to be relatively consistent across practitioners with the vast majority considering spread effects as well as transaction costs and taxes. Some asset managers also consider other dilution effects such as market impact as a component of the calculation. The survey found that asset managers are looking for 20

21 scalability across product types and jurisdictions where they apply swing pricing, and the number of fund domiciles where respondents are applying swing pricing techniques is wider than understood back in The vast majority of respondents have robust governance structures in place around the operation of swing pricing, many opting for a committee approach with a wide range of participation from relevant company departments and board members, and supported by relevant policy documentation. It is increasingly evident, from all of the above, that swing pricing is an accepted and well established anti-dilution standard in the marketplace and has become the most commonly practised form of anti-dilution protection. In 2011 there was a growing trend toward using the technique, but there was not enough of a population to confirm whether this was representative of the whole. In 2015, however, we believe there are enough respondents to conclude that swing pricing is an established market practice in Luxembourg for domestic and cross border fund ranges: optional in terms of application, but nonetheless accepted. There is a sizeable majority in the industry who adopt similar standards in their model, policy and processes, but who also have notable customisation in approach, with regard to the level of complexity and operational burden involved, the frequency of review and in governance policies. Customisation is perhaps a consequence of the principles based approach adopted in the Luxembourg industry, as opposed to having prescribed rules. Nevertheless, the principles of protecting against dilution remain consistent. It suggests that asset managers tailor their model to suit their unique product characteristics and operational capabilities, as well as how swing pricing may assist as a liquidity tool. It is apparent that the techniques used by some asset managers have become more sophisticated, for example, with regard to the components of the swing factor and the consideration of how swing thresholds are determined. It is safe to say that a healthy evolution of both theory and practice continues; swing pricing has become the preeminent anti dilution mechanism in the Luxembourg market place, and interest in and application of the technique is increasing in other countries. 21

22 about alfi The Association of the Luxembourg Fund Industry (ALFI), the representative body for the Luxembourg investment fund community, was founded in Today it represents more than Luxembourg-domiciled investment funds, asset management companies and a wide variety of service providers including depositary banks, fund administrators, transfer agents, distributors, law firms, consultants, tax advisers, auditors and accountants, specialist IT providers and communications agencies. Luxembourg is the largest fund domicile in Europe and its investment fund industry is a worldwide leader in cross-border fund distribution. Luxembourg-domiciled investment structures are distributed in more than 70 countries around the globe, with a particular focus on Europe, Asia, Latin America and the Middle East. ALFI defines its mission as to Lead industry efforts to make Luxembourg the most attractive international centre. Its main objectives are to: Help members capitalise on industry trends ALFI s many technical committees and working groups constantly review and analyse developments worldwide, as well as legal and regulatory changes in Luxembourg, the EU and beyond, to identify threats and opportunities for the Luxembourg fund industry. an effective contribution to decisionmaking through relevant input for changes to the regulatory framework, implementation of European directives and regulation of new products or services. Foster dedication to professional standards, integrity and quality Investor trust is essential for success in collective investment services and ALFI thus does all it can to promote high professional standards, quality products and services, and integrity. Action in this area includes organizing training at all levels, defining codes of conduct, transparency and good corporate governance, and supporting initiatives to combat money laundering. Promote the Luxembourg investment fund industry ALFI actively promotes the Luxembourg investment fund industry, its products and its services. It represents the sector in financial and economic missions organised by the Luxembourg government around the world and takes an active part in meetings of the global fund industry. ALFI is an active member of the European Fund and Asset Management Association, of the International Investment Funds Association, of Pensions Europe, of the International Association of Pension Funds Administrators (FIAP), and of the Global Impact Investing Network. For more information, visit our website at and follow us on social media! Shape regulation An up-to-date, innovative legal and fiscal environment is critical to defend and improve Luxembourg s competitive position as a centre for the domiciliation, administration and distribution of investment funds. Strong relationships with regulatory authorities, the government and the legislative body enable ALFI to make 22

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24 December 2015 ALFI. All rights reserved. guidelines Swing Pricing survey