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Protecting the interest of existing investors in a fund
Buying and selling securities in a fund generates trading costs such as brokerage fees, taxes and more. These costs can negatively impact the fund’s performance. Swing Pricing is a mechanism that transfers an estimate of the trading costs generated to investors who are subscribing into and redeeming out of a fund.
If net flows exceed a pre-determined level (known as the ‘Swing Threshold’), an adjustment (known as the ‘Swing Factor’) which is a percentage estimate of the trading costs is applied to the NAV per share. Please see the examples below for more information.
For the purpose of the examples we will assume the following:
|1. Swing Factor||0.25%|
|2. NAV per share||$100|
|3. Fund’s total assets under management (AUM)||$100m|
|4. Swing Threshold (as a percentage of AUM)||3%|
Example 1: No swing
The net flow of $2m does not exceed the Swing Threshold of $3m; therefore no swing adjustment is applied.
NAV per share: $100
Example 2: NAV Swung Up (Net Inflows)
The net flow of $7m exceeds the Swing Threshold of $3m; therefore an up-swing adjustment is applied.
NAV per share: $100.25
Example 3: NAV Swung Down (Net Outflows)
The net flow of - $4m exceeds the Swing Threshold of -$3m; therefore a down-swing adjustment is applied.
NAV per share: $99.75
The Swing Threshold will not be disclosed to investors as disclosing this may encourage subscriptions or redemptions below the swing threshold level which is not in the interest of long term investors.
In cases where an investor has subscribed or redeemed on a particular day, GSAM can advise if the fund swung or not and can disclose both the direction of swing and the current Swing Factor upon request from the investor.
Additionally, historical Swing Factors can be made available upon request. GSAM also publishes the prior month’s Swing Factor in the Monthly Fund Update of the relevant fund.
The below diagram illustrate how Swing Pricing may introduce some volatility to a fund’s performance due to the use of estimated rather than actual trading costs.
Assuming a fund’s performance is identical to the benchmark performance at the onset and the Swing Factor is 1%. (Note: NAV per share rounded to 2 decimal places).
For illustrative purposes only
In the above example, if the actual as opposed to estimated trading costs were applied, the fund’s performance would mirror that of the benchmark.
For more information on Swing Pricing please reach out to your local Sales representative.