Fair Valuation Pricing Survey, 14th edition

Perspectives

Fair Valuation Pricing Survey, 14th edition

Liquidity and business continuity rise in importance

The halt of the New York Stock Exchange in July 2015 and Britain’s vote to exit the European Union in June 2016 are just two examples of events that create price uncertainty. Such crises and other unexpected events can disturb portfolio valuations, and it is important for fund group executives to learn how to respond to the unexpected.

Introducing the Fair Valuation Pricing Survey, 14th edition

As the summary results of the 14th edition of the Deloitte Fair Valuation Pricing Survey (the “FV Survey”) indicate, fund groups are developing robust valuation policies and procedures and advanced valuation techniques and tools.

Liquidity is clearly of great interest to fund groups who continue to analyze their portfolio positions accordingly. By the same token, business continuity is garnering more industry attention, with fund groups considering how to address any potential disruptions in the availability of a service provider or pricing vendor.

Continuing a theme from last year, board governance is a key aspect of valuation oversight, and suggests that fund groups are not only meeting regulators’ expectations, but aim to get ahead of the unexpected in many ways.

Download our executive summary report for key FV Survey insights.

Fair Valuation Pricing Survey, 14th edition

Liquidity and valuation

This year’s FV Survey shows more than 40 percent of survey participants currently consider liquidity in the determination of some or all of their portfolio positions, and a handful of survey participants indicate they are developing policies in this area. In addition, most fund groups have designated a specific function to be responsible for the initial determination of a security’s liquidity, with the front office identified as the most commonly deployed for this purpose.

The FV Survey provides a handful of practices that represent opportunities for considering liquidity and valuation, including the following:

  • Alter internal controls. Twenty-six percent of all survey participants adjust the internal controls that they perform within an investment type based on the liquidity of the positions. This sort of segmentation means adopting a new lens when monitoring these instruments for unchanged prices, day-over-day tolerances, bid-ask spread analysis, and the frequency by which additional sources are obtained or securities are internally modeled. While these are not necessarily novel concepts, this level of focus may help pinpoint situations in which the pricing is becoming less reliable.
  • Involve risk management personnel. Half of the fund groups that have a risk function indicated that their risk mission or charter includes the assessment of liquidity relative to valuation. Risk-based tools may provide leading indicators of market changes that could help in this respect.
  • Form a liquidity committee. Twenty-nine percent of fund groups have a specific committee that reviews and considers the liquidity of the fund group's holdings. While by no means required, such a committee may allow for the sharing of data points that may prove more helpful than standard measures, particularly when they consist of a variety of interested parties. Collaboration can be very helpful in addressing developing liquidity concerns.

For more insight on business continuity and active board governance, download our report.

Liquidity and valuation
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