Vanguard says platforms were frustrated by its dilution levies

Nick Blake
Vanguard head of marketing Nick Blake

Vanguard says platforms frustrated by its dilution levies were a driving force behind its switch to swing pricing, while it argues investors should see TERs come down from the move.

The change came into place across its UK and Dublin-domiciled funds this month, but will not apply on ETFs.

Head of marketing Nick Blake says platforms had operational difficulties with the dilution levies that Vanguard previously used.

“Swing pricing is the norm in the UK and Europe so most platforms weren’t set up to deal with paying an additional dilution levy and reflecting that in contract notes.”

Blake adds there was a perception problem with dilution levies.

“Unfortunately some people often thought that was a charge that we were collecting as Vanguard the management company. We had to keep reminding people that it went back into the fund.”

Swing pricing also directs money back into the fund to offset costs, although Blake notes it too has viewed negatively in the past.

“There was a time many years ago when people worried about the opaqueness of swing pricing, but with all the transparency we’ve got coming now with costs and charges we’re comfortable clients can see the full effect of these dilution approaches.”

Blake stresses intermediaries and investors will not be impacted by the change.

“If you do have someone who chooses to come in and out of the fund fairly regularly that’s fine. They’ll now be enjoying the swing price – the entry or exit NAV on those days,” says Blake.

“The key thing is there are no residual costs that are being borne by the ongoing investors in the fund.”

In fact, information sent to investors about Vanguard’s changes says total expense ratios should go down.

Vanguard told investors the switch could attract more inflows as the model is preferred over other available methods.

L&G, Fidelity, JPMorgan Asset Management and Goldman Sachs Asset Management already adopt the swing pricing model and Jupiter will introduce it to their unit trust range in January 2018.

A Securities and Exchange Commission amendment to the Investment Company Act means swing pricing will be available in the US from November 2018. ETFs and money market funds will be excluded from using the model when it is introduced next year.

Blake says Vanguard’s domicile in the US had no bearing on its late adoption of swing pricing.

Despite its dilution levies, Vanguard was already available across all UK platforms and the switch to swing pricing will not increase the availability of its products.

Fund Strategy reported this week that swing pricing can dampen outflows in underperforming funds, but fails to have any impact during times of market stress. The Bank of International Settlements analysis also noted managers with swing pricing tend to hold less cash.