ORCHESTRATE LARGE REALLOCATION EVENTS
WHO CAN BENEFIT
Funds of funds, asset allocation funds, target date funds and lifecycle funds that are engaged in asset allocation.
PROBLEM
When assets are reallocated from one mutual fund to another, the funds involved must deal with resulting impacts: high turnover, increased tracking error, costly transactions, and the related tax burdens. When reallocations occur within a mutual fund complex or fund-of-funds, shareholders are hit on both sides of the asset shift. With the recent disruption of traditional supply-demand relationships, it has become even more difficult and costly for funds to get in and out of securities.
SOLUTION
By using NAVswap to equitize and manage cash positions, funds can manage the negative impacts on both sides of a reallocation event. With NAVswap, ReFlow pays funds a return on cash matching the appreciation/depreciation in their NAV.
- Leading up to the reallocation event, the fund distributing assets uses NAVswap to build up an equitized cash position until it equals the amount of the reallocation (up to a maximum of 15% of NAV).
- In turn, the fund receiving assets also uses NAVswap to equitize the entire amount of cash received.
- The receiving fund immediately begins working off its NAVswap position by investing the cash received. The speed with which the fund reduces and closes out its position may vary depending on the investment strategy and opportunities.
BENEFITS
- The distributing fund is able to raise cash without paying penalties in terms of performance, tracking error, and style drift.
- The receiving fund is able to absorb a large sum of cash in a controlled, cost-effective way.
- Both funds are able to preserve the integrity of their investment processes.
- Shareholders benefit from improved performance on both sides of the reallocation.
