7A.4 Forward and Historical Pricing, and the UTMC's Holding of Units
Key Takeaways
Under historical pricing, an investor deals at the NAV determined at the close of the previous business day.
Under forward pricing, units are bought and sold at the NAV calculated at the next valuation point after the request is received.
The UTF Guidelines permit forward or historical pricing, but the SC's guidance says funds should adopt forward pricing to reduce arbitrage, with historical pricing possible for certain money market funds.
A fund using historical pricing must add a mid-day valuation point and re-price units if the price differs by more than 5% from the last valuation point.
A UTMC may hold units only to facilitate sales and repurchases and reduce creations and cancellations, within maximum holdings set by the SC.
Historical Pricing
Under historical pricing, an investor buying or selling today deals at the NAV determined at the close of the previous business day. Investors and Consultants know the price in advance and can tell exactly how many units an application will buy.
The problem: suppose Bursa Malaysia rises strongly today. Investors who apply today still get yesterday's lower NAV; tomorrow's NAV will reflect the rise, so they gain at the expense of existing unit holders. The same works in reverse when markets fall and investors redeem at yesterday's higher price. This arbitrage dilutes the value of existing holdings.
Forward Pricing
Under forward pricing, units are allotted (or redeemed) at the NAV calculated at the next valuation point after the request is received, usually the close of business on the day of receipt. Everyone deals at fair value, and the UTMC creates or cancels units with the Trustee at the same valuation point.
Study guide example 1: overnight market moves
| Event | Under forward pricing |
|---|---|
| Fund A's published NAV on 20 March is RM1.00. Overnight, overseas markets plunge. Unit holder X redeems on 21 March | X receives the 21 March NAV of RM0.98. Paying RM1.00 would give X RM0.02 per unit at others' expense |
| Overseas markets rally instead. Unit holder Q buys on 21 March | Q pays the 21 March NAV of RM1.03. Buying at RM1.00 would let Q profit at others' expense |
Study guide example 2: the valuation point decides
UTS AAA values at 4.00 pm each business day. NAV was RM1.00 on 23 January and RM1.20 on 24 January.
| Request | Price used |
|---|---|
| Mr A applies on 23 January at 12 noon | 23 January NAV (RM1.00), which is only published the following day |
| Mr X applies on 23 January at 5.00 pm | After the valuation point, so the 24 January NAV (RM1.20) |
Under forward pricing the price depends on the next valuation point, and valuation points differ between UTMCs. FIMM's practice question: a fund values at 4.00 pm; Ali applies on 18 August at 2.00 pm, so he receives the 18 August NAV.
Quick drill (forward pricing, 4.00 pm valuation point, business days Monday to Friday)
| Request received | NAV used |
|---|---|
| Tuesday 10.00 am | Tuesday's 4.00 pm NAV |
| Tuesday 3.59 pm | Tuesday's 4.00 pm NAV |
| Tuesday 4.15 pm | Wednesday's 4.00 pm NAV |
| Friday 6.00 pm | Monday's 4.00 pm NAV (next business day) |
What the Rules Say
| Rule | Source |
|---|---|
| Dealing must be at either a forward price or a historical price | UTF Guidelines paragraph 8.39 |
| With historical pricing, an extra mid-day valuation point, re-pricing if the price differs by more than 5% from the last valuation point | UTF Guidelines paragraph 8.40 (the study guide words it as "5% or more") |
| Funds should adopt forward pricing to match international practice and cut arbitrage; historical pricing may be considered for certain money market funds, given their low volatility | SC Guidance to the UTF Guidelines |
| The prospectus must state the pricing policy | Prospectus Guidelines (section 4.1) |
Note
Historical pricing has not been abolished; it remains permitted. But forward pricing is the expected norm for most funds.
Comparing the Two
| Feature | Historical pricing | Forward pricing |
|---|---|---|
| Price known when applying? | Yes | No |
| Fairness to existing investors | Exposed to arbitrage and dilution | Fair: everyone deals at the next NAV |
| Typical use | Some money market funds | Most funds |
| Extra safeguard | Mid-day re-pricing if the move exceeds 5% | Not needed |
Holding of Units by the UTMC
A UTMC may hold units only to facilitate sales and repurchases and to reduce the number of creations and cancellations with the Trustee. Its stock rises and falls with NAV, so it can make a profit or loss on it. The SC sets maximum holdings to limit the UTMC's exposure. Where a UTMC or related company holds units in a fund it manages, it must have policies, procedures and controls to manage conflicts of interest.
Applying It
A Consultant tells a client at 3.30 pm: "Today's price is RM1.25, so your RM10,000 buys exactly 8,000 units." If the fund uses forward pricing with a 4.00 pm valuation point, the client will pay today's 4.00 pm NAV, which is not yet known, so the number of units cannot be promised. The Consultant should explain forward pricing instead of quoting yesterday's price as if it were final.
A fund uses forward pricing with a 4.00 pm valuation point. An investor submits a purchase request at 2.00 pm on 18 August. NAVs are RM0.9132 on 17 August, RM0.9218 on 18 August and RM0.9311 on 19 August. Which NAV applies?
RM0.9132
RM0.9311
RM0.9218
The average of the three prices
Why is forward pricing considered fairer than historical pricing?
It lets investors and Consultants know the exact unit price before applying
It guarantees that investors always receive a higher NAV
It removes the need for a daily valuation point at all
It stops investors profiting from stale prices at others' expense
Under the UTF Guidelines, what must a fund using historical pricing do?
Add a mid-day valuation point and re-price if the move exceeds 5%
Convert to forward pricing within one financial year of launch
Publish its price once a week instead of every dealing day
Obtain unit holders' approval for the pricing method every year
Sections you finish are checked off in the contents.