Valuation of funds
How is a fund valued?
Generally speaking, the value of a fund is determined by its net asset value (NAV), which is equal to the total value of the assets minus total value of the liabilities. A fund’s bid (redemption) and offer (subscription) prices are based on the fund’s NAV divided by the number of units/shares outstanding. Such prices may be adjusted by fees and charges, provided the amount or methodology is disclosed in the offering documents.
How do a fund’s subscriptions or redemptions affect its value?
The subscriptions or redemptions of a fund by investors may have a potential impact on the value of a fund. In particular if the subscription or redemption involves the purchase and/or sale of the underlying investments in a fund portfolio, that would incur trading costs and related expenses including transaction charges, brokerage fees, taxes and bid/offer spreads. The aggregate costs arising from such purchase and/or sale of the underlying investments in a fund portfolio would be charged to the fund and therefore would dilute its NAV. This impact, known as the “dilution effect” may affect the interests of the unit holders of the fund.
Can the dilution effect be minimised?
A fund manager may apply anti-dilution measures in order to minimise the dilution effect of a fund’s NAV for the purpose to safeguard the interest of those investors remaining in the fund. In making such decisions, the fund manager will take into account various factors such as the type of fund, costs of transacting the underlying investments, administrative costs, implementation considerations and/or the fund’s cash management strategy.
Investors should refer to the offering documents of the fund, in which there is disclosure about whether there are any anti-dilution measures adopted by the fund, and if so, the type of measures in place, how such measure works and under what circumstances the application of the anti-dilution measures may be triggered. If in doubt, you should contact the relevant fund houses and/or intermediaries for further information.
What are the common types of anti-dilution measures?
Anti-dilution levy and swing pricing are the common types of anti-dilution measures applicable to funds.
Anti-dilution levy/ bid-offer spreads:
An extra charge may be levied by fund managers on investors subscribing or redeeming any units or shares of a fund to offset any potential effect on the value of the fund related to such subscriptions or redemptions. The fund managers may choose to implement these charges in order that the prices at which an investor subscribes for or redeems units of the fund will be more reflective of the costs that would be incurred by the fund in order to buy or sell the underlying investments to accommodate such dealing requests. An anti-dilution levy which is usually expressed as a percentage of the NAV of the fund, will be imposed to account for the impact of the related costs and may be reflected in the calculation of offer and/or bid prices of the fund, as applicable:
Investors who subscribe the units of the fund will pay:
Offer price = NAV of the fund + anti-dilution levy
Investors who redeem the units of the fund will receive:
Bid price = NAV of the fund – anti-dilution levy
The proceed from the levy will generally be retained by the fund in order to mitigate the dilution effect on the fund for investors remaining in the fund.
This is generally a mechanism which adjusts the fund’s NAV to account for the costs of buying or selling underlying investments that may result from investors subscribing or redeeming units or shares of the fund. Swing pricing policy may vary between different funds and fund managers.
After netting off the subscription and redemption amounts at the end of each dealing day, the subscription and redemption price for these investors will then be based on the NAV of the fund which may be adjusted upwards or downwards by a certain basis point to reflect the relevant costs incurred:
- if a fund is in a net subscription position (i.e. net inflows), the NAV of the fund will be adjusted upwards; or
- if a fund is in a net redemption position (i.e. net outflows), the NAV of the fund will be adjusted downwards.
This basis point adjustment is known as the swing factor. Swing factor which is generally expressed as a percentage of the fund’s NAV can vary over time and may be subject to a maximum level set by the fund manager. Such adjustment aims to mitigate the dilution effect on the fund for the remaining investors.
It is at the discretion of the fund manager to determine whether the swing pricing is fully or partially adopted. For a partial swing pricing, the basis point adjustment may only be applied when the net amount of subscriptions or redemptions of the fund on any dealing day exceeds a pre-determined threshold as may be determined internally by the relevant fund manager. Such policy should be applied consistently by the fund manager. There will be no threshold if a full swing pricing mechanism is adopted.
How would swing pricing affect investors?
Swing pricing aims to reflect in the NAV the costs of trading underlying investments as a result of material or frequent investor dealings and therefore protects against dilution at the fund level on the relevant dealing day. As such, individual subscribing/redeeming investors may be affected by the adjusted NAV, depending upon the extent of the level of collective dealing activities of other investors; and their redemption and subscription transactions on a net basis as of the relevant dealing day.