The National Securities Market Commission (CNMV) has been insisting for months on the need to fund managers to strengthen their liquidity mechanisms. A key precaution to what may be to come in the coronavirus crisis and in which the swing pricing It is emerging as a preferred option for the industry. What does this tool imply for the participant?
Both from the asset management sector and from the supervisor itself, it is emphasized that, above all, the introduction of this mechanism translates into security for the investor of a fund in which it is applied. However, it also implies punishment for those who allow themselves to be carried away by the extremes of euphoria and panic – so common in recent months – in their subscription or redemption decisions.
Although swing pricing is just one of the formulas to ensure liquidity in investment funds, from the industry point out that it is one of the companies with the most satisfactory results for the preservation of correct liquidity as well as a longer track record. In this sense, several managers comment that this technique has been applied “informally” in various vehicles for a long time.
Ready to activate
However, this tool only came into play for significant operations carried out by institutional investors. Now, as a result of the supervisor’s recent insistence, swing pricing promises to become general and also extend to the most modest participants. The signal that the change is underway has been given by Bestinver, which has introduced this formula for the management of subscription and redemption orders in the prospectus of four of its fixed income funds.
From sources close to the firm they assure that “It is very difficult” that this mechanism has to be activated in the short term, but with this movement the ointment to preserve liquidity is available in case this Covid-19 crisis should cause injuries. Currently, there are many international managers that have this defense mechanism in place in several of their funds, especially those that offer lower commissions to their participants.
This last group includes some of Vanguard’s “ultra-low” costs, but other well-known managers on both sides of the Atlantic such as Degroof Petercam, Schroders, Edmond de Rothschild, Groupama and Lazard have this tool. A situation that, in addition, affects funds of funds with participation in these vehicles.
An example of this circumstance is found without leaving the Spanish ecosystem of investment funds. The roboadvisor Indexa Capital invests in several Vanguard vehicles who have this protection tool. The co-founder and co-CEO of the firm, Unai Asenjo, explains that, in fact, it is “a beneficial mechanism for our management model.”
Costs against panic
Among the reasons he gives for this statement are several arguments shared by a vast majority of the Spanish industry. Firstly, the focus on long-term investors, for which it should be remembered that the bulk of Spanish funds they recommend investment periods of between three and five years as a minimum.
Later, Asenjo explains that this swing pricing contributes to reinforcing its message of “not selling at a time of falls and massive outflows of funds and not buying more after increases with massive inflows.”
This explanation is understood by the very operation of this tool, whose translation into Spanish could be Oscila swing price ’. The costs involved in investing the money that enters a fund or that the disinvestments associated with a redemption order entail no longer affect the group of the participants of the same – although they may be amortized thanks to the establishment of specific commissions– and they are assumed by those who move their wallet every day.
With small technical differences, this system consists in that on a day in which the reimbursements are in the majority, the net asset value to be received by those who withdraw from the fund is reduced based on a predetermined and public price factor. Conversely, if the subscriptions are more, the entry net asset value is increased based on this factor. Of course, the change can occur always or from certain trading volumes.
The adviser’s advice
In the latter case, these thresholds they are not usually public to avoid arbitration of institutional investors, who could distribute their sales to escape this penalty. Here, the advice of the financial advisors consulted by Invertia is twofold: do not get carried away by the mainstream of the market on days of high volatility and always calculate what could be the added cost to assume based on the price factor and the last net asset value of the fund.
The possibility that the participant can make investment decisions at all times and assume through this price increase or cut the cost of their decision is what makes this tool emerge as the industry favorite. And is that those who remain faithful to their manager do not suffer more than the swings of the price of your participations without added penalties.
More attractive than notice
Conversely, the possibility of enter a notice period looks less attractive. This tool, recently established by the CNMV, supposes an added workload for the administrators of the funds as well as giving an image of less instantaneous liquidity.
Furthermore, although this mechanism is not incompatible with the setting of ‘swing pricing’, by itself it does not free the participants who hold positions to face the costs that the entry or exit of their investment partners may entail.