JP Morgan list of sub-custodians
Dilution adjustment - OEIC
At Capital Group, we are constantly looking for ways to protect our investors’ long-term interests, and this extends to limiting the dilution impact of trading costs. Following a review of the different options available to us for offsetting this dilution effect, our UK OEIC funds have implemented a practice known as 'dilution adjustment', which is also known as ‘swing pricing’.
In the absence of anti-dilution measures, trading costs incurred by investors redeeming or subscribing are borne proportionally by all shareholders in a given fund. These trading activity-related costs result in dilution of the value of existing shareholders’ investment in a fund. Dilution adjustment serves as a means of mitigating the dilution effect.
Dilution adjustment has become the standard anti-dilution tool in the European fund management industry due to the advantages it offers investors. Essentially, dilution adjustment serves as a mechanism to ensure that costs incurred by investors who are buying or selling are borne by those investors, rather than spreading the costs across the existing investors in the fund.
Dilution adjustment is a mechanism by which long-term shareholders are protected against the dilution impact of securities trading that relates to investors entering or exiting the fund.
This dilution impact of securities trading includes the following elements:
With dilution adjustment, subsequent to the existing daily Net Asset Value (NAV) calculation, the NAV is then adjusted to include this dilution impact. This adjustment, either up or down by a pre-determined amount, is commonly referred to as the ‘dilution adjustment’.
There are two types of dilution adjustment: ‘full’ and ‘partial’. With full dilution adjustment the price will move regardless of the size of the net flows, whereas with partial dilution adjustment the price is adjusted only if the net capital flows exceed a pre-determined threshold, which is aligned to when dilution is incurred.
We consider partial dilution adjustment the more appropriate option as the factor will be applied to the NAV only in line with overall shareholder activity in the fund, and only if the net capital flows exceed a pre-determined threshold that would make securities trading more likely.
The table below outlines the impact of swing pricing on both dealing and nondealing shareholders:
A robust governance framework is in place to monitor the effectiveness of our use of dilution adjustment. All the relevant factors and thresholds are regularly reviewed.
This continuous review of the trading costs ensures the dilution adjustment factors are set at appropriate levels. For transparency, the dilution adjustment factors for each fund are published on our website.
Dilution adjustment is a provision within the prospectus for each of our funds, and is consistently applied.
We would like to reiterate our view that dilution adjustment offers an additional level of protection to our funds and, moreover, to our investors. Additionally, while the aim of dilution adjustment is not to enhance results over time, its impact can be beneficial to a long-term investor’s net returns.
Our OEIC funds have implemented dilution adjustment following a thorough review and consultation process, and with the best interests of our investors in mind. The dilution effects of trading costs must be addressed, and we believe that partial dilution adjustment provides the best form of protection available.