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What is Swing Pricing and how does it affect KiwiSaver?

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When researching KiwiSaver funds, it is important to look at more than simply past performance and general fees. Factors such as internal processes and trading costs will impact your final outcome.

For example, in their latest Product Disclosure Statement, Milford Asset Management mentioned they will be introducing swing pricing. What does that mean and will it have an impact on your returns?

What is Swing Pricing?

Swing pricing is a pricing technique that changes the net asset value (NAV) per unit of investment. This mechanism is used to protect long-term investors who are impacted by other investors buying and selling units of a fund.

Significant short-term buying and selling activity within a fund can result in excessive transaction fees that impact shareholder value. To prevent these issues, fund providers use swing pricing to protect long term investors from the dilution caused by shareholder activity. 

Swing pricing can impact the price of the investment when an investor is buying or selling units of that fund. If the quantity of units traded in a particular day meets a certain threshold, fund providers can adjust the price per unit up or down based on the net direction of the fund flows.

  • If the net inflows are above the threshold for a particular day, the swing adjustment will result in the price of the fund to have a slight increase.
  • If the net outflows exceed the threshold, the swing adjustment will result in the price of the fund to have a slight decrease.
  • If the net flow of investments does not exceed the set thresholds, swing pricing is not implemented.

The purpose of swing pricing is to protect existing investors by altering the valuations of a fund so that the true cost of producing or disposing of the extra units can be represented. In other words, swing pricing is designed to more appropriately and fairly spread the transaction costs between those investors buying or selling units in a fund with existing unitholders who are not transacting.

The swing factor adjustment is not a fee paid to the fund manager. Instead, it is retained in the fund to offset estimated transaction costs. 

So What Does Swing Pricing Mean For You as an Investor?

Let's say Mark invests $10,000 into Milford’s Balanced KiwiSaver fund and there are no establishment or contribution fees that need to be paid. If a swing factor adjustment of 0.13% applies, Mark will need to pay $13 into the fund. This means the starting value of Mark’s investment will be approximately $9,987. However, this $13 will remain in the fund for the benefit of Mark and other investors in the fund. It will not be paid out to Milford because it is not a fee. 

Swing pricing passes the transaction costs to the shareholders associated with the activity. This benefits long-term investors who do not switch their KiwiSaver fund as their investment bears less of the trading costs. 

Usually, trading costs and fees come out of the fund’s total net assets and are, therefore, spread across all shareholders. Swing pricing helps assure that these trading costs are passed on to the appropriate individuals responsible for the trading activity. Being a long-term KiwiSaver investor, swing pricing means that you aren’t materially impacted by these trading costs, thus protecting the value of your KiwiSaver investment.

KiwiSaver is Long-Term

KiwiSaver is a long-term investment. This is why it is usually not a good idea to be moving funds too much. If you are thinking about sorting out or changing your KiwiSaver fund, talk to one of our financial advisors beforehand.

There are many factors to consider when choosing a suitable KiwiSaver fund. Just looking at past performance and fees is not enough. If you are switching funds, you should be aware of the different trading costs (such as swing pricing) and impacts that switching KiwiSaver providers or funds will have on your long-term retirement outcomes.

National Capital specialises in KiwiSaver and Investment research with the goal of helping 1 million Kiwis become financially secure. For free personalised online KiwiSaver advice, complete National Capital’s KiwiSaver HealthCheck.

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