Transcription

1 M&G Retail Fund pricing policy November 2014 Contents Page Purpose of policy 1 Scope 1 M&G s pricing methodology 1 Calculation of prices 2 M&G Property Portfolio and M&G Feeder of Property Portfolio 4 Book management Purpose of policy This document describes M&G s pricing policy for its retail OEIC funds, in particular the principles underlying: Pricing methodology Calculation of prices Operation of a book of fund shares to mitigate price volatility Objective of policy The objective of this policy is to ensure M&G s Retail funds are consistently priced using a methodology that is as fair as is practicable to all investors, and is compliant with all applicable rules and regulations. The policy aims to protect the funds from the impact of dilution and reduce price volatility where possible. Scope The policy is applied to all M&G s UK-domiciled retail OEIC funds, M&G Property Portfolio and M&G Feeder of Property Portfolio. M&G s pricing methodology M&G operates a fully swinging single price (FSSP) methodology for all its UK-domiciled retail OEIC funds. This method aims to protect existing investors from the potential impact of dilution generated by investors buying or selling shares in a fund. The M&G Property Portfolio and M&G Feeder of Property Portfolio are dual priced with a discretionary large deal provision, achieving a similar outcome. Dilution due to transactions activity When an investor buys or sells shares in a fund, costs are usually incurred on the resulting transactions in underlying securities. These costs can comprise of commissions, taxes and market spreads. If a fund is priced using a single mid-price, transaction costs will not be borne by incoming or outgoing investors,

2 but by all current investors in the fund. This effect is known as dilution. It causes the value of all existing investors holdings to be reduced. Protecting investors from dilution In order to protect the interests of existing investors, various methods may be used to allocate the costs associated with transactions in fund shares to those investors entering or leaving the fund. The FSSP methodology aims to allocate transaction costs for net flows into or out of a fund on any given day by using a dilution adjustment to adjust the price at which shares are bought or sold away from the net asset value (NAV) of the fund. Creation and cancellation pricing bases Prices are swung depending on whether overall net fund flows on a given day are into a fund (creation basis) or out of a fund (cancellation basis). The swing takes into account the costs of buying or selling the underlying securities held by the fund. A creation basis includes addition of a dilution adjustment to reflect the offer prices at which securities are bought, plus transaction costs; a cancellation basis includes subtraction of a dilution adjustment to reflect the bid prices at which securities are sold, less transaction costs. If the direction of net fund flows changes from one day to the next then the fund price will swing from creation to cancellation, or vice versa. The full swing factor from creation to cancellation is the sum of the dilution adjustments from NAV to creation and from NAV to cancellation. If there are no flows on a given day, pricing will remain on the same basis as the previous day. Prices are swung automatically; there is no dependence on the size of flows into or out of the fund. Calculation of prices Calculation of NAV The NAV of a fund is calculated based on the valuation of the underlying assets held. Specific rules for valuing different types of assets are detailed in the prospectus, but prices used are generally the latest available at the time of the fund valuation, or those believed to be most appropriate by the authorised corporate director (ACD). Swing factors The swing factor is calculated daily by State Street (M&G s pricing service provider), reflecting the underlying securities held by a fund on that day. It comprises the following elements: Market spread (all fund holdings) Dealing commissions (equities and ETFs only) Transaction taxes (equities only) 2

3 Elements of the swing factor example of a swing from creation to cancellation Transaction costs included in the swing factor calculation reflect the impact of a theoretical investment or divestment of the assets currently held in the portfolio. It is important to note that the above factors will vary depending on the market and the type of underlying securities held by a fund. For example, for fixed interest securities, dealing commission and taxes, where applicable, are incorporated into the market spread. Spreads can therefore be materially different between different funds depending on which securities they hold and the markets in which they invest. Swing factors are calculated daily, and thus will reflect current market conditions. Market spread For each type of asset held across M&G funds, a consistent pricing and market spread basis is used. A stock is therefore valued with the same bid and offer prices for all funds in which it is held. For equity holdings the spread is calculated using the last available quoted market bid and ask prices as at the noon UK time valuation point. For markets closed at that time, such as the US, closing prices from the previous day are used. As a result, market prices used reflect trading activity immediately prior to the valuation point. They are generally the smallest of the three components of the swing factor. They can however move significantly from one day to the next. For fixed interest holdings the market spread is the only component of the swing factor. As bonds are not exchange traded, there are no market data from which current bid and ask prices can be established. State Street therefore uses the Bloomberg Data License feed which provides individual broker quotes from a pre-defined hierarchy of brokers. Where possible, 3 to 5 brokers will be pre-selected for each bond and the quote from the single broker quoting closest to the valuation point will be used. These prices do not reflect the actual size in which a fund might deal; also, the brokers the fund has actually dealt with may not necessarily have quoted close to noon on that valuation day. No market spread is used for derivatives, property assets or cash. Dealing commissions For equity shares and ETFs, a notional dealing commission (NDC) is assumed to be incurred on each trade. 3

4 Dealing commissions may relate to research or execution. The research element of commission is excluded from the NDC when calculating swing factors, as research costs are not related directly to transaction activity. The only element of commission included in the NDC is therefore that relating to execution. Execution commission is dependent on the stock market (country) where the trade occurs and the NDC reflects the terms that M&G have negotiated in each market for normal trading. Execution may be carried out by a programme trade which can result in lower actual commission rates, for example reducing the 5bps cost for a normal trade to 3-4bps, but the NDC calculation does not reflect this. NDCs are reviewed on a quarterly basis against actual transactions in each market. They can vary significantly over time. Transaction taxes Transaction taxes are dependent on which country a trade occurs in, and are thus set at a country level. Relevant taxes are generally only charged on the buy side, although there are markets (for example Hong Kong) where taxes are charged on both the buy and sell sides. Tax rates are monitored and updated continuously by State Street. Governance M&G s Finance and Tax Committee is responsible for reviewing the pricing calculation methodology. In addition, this committee reviews and signs off all swing factors by fund on a quarterly basis, in order to ensure they are broadly in line with historic experience. In addition, a review of dilution that would have been suffered by funds compared with that recovered from investors is submitted to the Finance and Tax Committee for review on a six monthly basis. M&G also operates a number of controls for spreads used in price calculations. Price levels by instrument are reconciled against internal valuations on a daily basis, taking into account both price and materiality of the holding. On a daily basis the full spread of each fund is checked for reasonableness against a pre-defined range. Any breaches of this range are investigated, explained and documented. Spreads are also compared to an internally generated spread on a daily basis and for any exceptions the cause of the discrepancy is investigated. There are also weekly stale price reports and any trade that has been executed outside the set tolerance of quoted prices is investigated. State Street calculate fund prices on M&G s behalf. They have their own internal quality assurance checks and controls to ensure prices are accurate. These checks are reviewed and approved on a periodic basis by M&G. M&G Property Portfolio and M&G Feeder of Property Portfolio The M&G Property Portfolio and its feeder fund are both dual-priced funds with a large deal provision. However, in practice neither fund imposes the dual-price spread on clients. Bid and offer prices (after removing the effect of initial charges) are the same on each share class, and are set at a creation or cancellation basis depending on the direction of flows. This procedure delivers an equivalent result to a single-priced fund, but enables M&G to protect the fund and it s investors against undue price volatility. This is seen as an important investor expectation for a bricks and mortar property fund. In order to achieve this reduced volatility the large deal provision can be used to impose a price on any single deal in excess of 50,000. This will avoid swinging the price where there are single large deals that are contrary to the prevailing flows, and will reduce published price volatility (the property funds have very large swing factors). Deals considered large are given a price other than the published price generally that will be the creation or cancellation price but it could be somewhere between the two. Normal deals (ie, those not deemed to be large) continue to receive the published price. The application of the large deal provision is at the discretion of the M&G Book Management team. 4

5 In the calculation of creation and cancellation prices, allowance is made for Stamp Duty Land Tax (SDLT) on UK properties. There is also an allowance for the costs associated with the buying and selling of properties, legal fees, search costs, marketing costs, agent fees etc. There is no allowance for broker dealing commissions as they do not exist in this market. The actual costs incurred for these items, compared with this allowance, are reviewed on a monthly basis by the fund management team, and also quarterly by the Finance and Tax committee. Book management Fully swinging single pricing aims to avoid any dilution for existing investors in M&G funds. However, this may result in short-term price volatility due to price swings, which is viewed negatively by some investors. To help mitigate this volatility, a system of discretionary book management is operated, using M&G s own capital to hold a book of fund shares from which purchases and sales are made to minimise price swings. This acts as a shock absorber for fund prices as it helps smooth out the impact on the fund price of sudden changes in the direction of flows. Purpose of the book The sole purpose of the book is to reduce price volatility for investors; it is not operated to make a profit for M&G (although with the exception of charities funds, M&G retains any profit or loss arising due to price movements on book holdings, as it bears the market risk of these holdings). Before using the book to maintain a pricing basis, consideration is given to both the historic and expected future level and direction of net client flows. Book limits M&G has strict limits around the amount of capital that can be used to hold fund shares on the book. Risk-based limits on the absolute amount are determined by the M&G Securities Board on an annual basis and applied by asset class (in exceptional cases asset class limits can be overridden with the approval of the M&G Securities Finance Director or M&G Group Chief Financial Officer). Book limits are not disclosed externally as this might lead some investors to attempt to benefit from pricing basis changes. Operation of the book Purchases and sales are made from the book on a discretionary basis by M&G in order to reduce price volatility. For example: 1) If outflows occur for any given fund, and that fund is on creation basis, M&G Securities Limited can take the decision to purchase shares and hold them within the book on its balance sheet in order to keep the pricing basis at creation. In the event that it chooses not to do so, the pricing basis will swing to cancellation and the excess shares will be cancelled. 2) If inflows occur, and the fund is on cancellation basis, M&G Securities Limited may choose to sell some or all of its book of shares in order to maintain the pricing basis at cancellation (although this may not be possible depending on the level of flows and the size of the book held). In the event that it chooses not to do so then the pricing basis will swing to creation and the necessary shares will be created. Purchases and sales from the book are made solely to negate potential price swings, and are always on nonadvantageous terms. Discretionary book management Maintenance of a pricing basis using the book is always at the discretion of M&G. It is not possible to maintain the basis for all funds at all times due to the potential size and volatility of flows and the impact of the book limits, even if changes in flow patterns are thought to be temporary (and hence it would be desirable to maintain the basis). Priority is generally given to larger funds where more investors would be impacted by price volatility, and to fixed interest funds, for which lower price volatility is expected by some investors, and also to funds where any change in the direction of flows is thought to be short-term in nature. General market sentiment and conditions are also taken into account. However, there will always be a discretionary element to book decisions, which assists in preventing investors attempting to benefit from them. 5

6 Controls around pricing basis changes include automated monitoring of book limits in the book management system, including automated change of pricing basis to creation if inflows lead to a short position. In addition, all pricing basis changes are approved by a second person and all book decisions (creations or cancellations) are reviewed by a second member of the Book Management team. The following examples illustrate how the book operates as a shock absorber for changes in the direction of flows and hence reduces the incidence of price swings. 1. Flow changing direction from inflow to outflow future outflows expected The direction of flows has changed over time, and outflows are expected to continue. The book is not used as it is appropriate to swing the price from creation to cancellation. 2. Outflow for one day, future inflows expected, book not used 6

7 As the change in direction of flows is only temporary, the price swings twice in two days (from creation to cancellation, and then back). In our view, this causes unnecessary price volatility. 7

8 3. Outflow for one day, future inflows expected, book used to absorb impact The book is used to purchase the shares redeemed, and thus absorb net outflows. Two unnecessary price swings are avoided. Governance Book limits are reviewed by the Board of M&G Securities Limited on an annual basis in order to set the level of capital allocated and market risk that M&G is willing to take in order to reduce price volatility using the book. Management information on the number of swings avoided, book sector limit utilisation and any profit or loss on the book is reported to the M&G Retail Investment Operations Committee on a monthly basis. M&G November