2020 fair valuation pricing survey has been saved
2020 fair valuation pricing survey
The 18th edition explores valuation practices amid volatility
2020 has been a year like no other in recent history. The 18th edition of our fair valuation pricing survey explores how valuation processes are able to remain resilient in the face of pandemic-related disruptions and evolving regulations. A greater focus on technology and data analytics—along with good planning and agile leadership—could help investment organizations stay the course through this unprecedented storm.
Valuation processes put to the test
If we could use only one word to describe 2020 so far, surreal may be the best one.
It all started in March. Employees were sent home to work on a remote basis, creating a mass of empty office buildings in cities across the United States. The markets experienced unprecedented volatility and disruption, as the Dow fell 10,000 points, ending a 10-plus-year run of a bull market. The US government and regulators took aggressive and proactive steps that froze the economy while scientists searched for answers and a cure and health professionals attended to an ever-increasing number of infected patients. The changes were swift and overwhelming.
The 18th edition of the fair valuation pricing survey (FV survey) was launched for participation in summer 2020, and it was just in time to capture how the myriad of challenges of this year have affected registered investment companies (fund groups) as they valued their investments.
Despite all of the challenges, the valuation process has not capsized. Our FV survey executive summary explores how it has been able to remain resilient and may continue to do so moving forward.
Responding to an unanticipated risk
Many factors have contributed to delays in calculating net asset values (NAV) per share since the pandemic began. Eighty-one percent of FV survey participants reported they had experienced at least one of the difficulties shown below.
Despite these factors, fund groups have continued to strike and publish NAVs throughout the pandemic. The FV survey results suggest two key reasons why the process remained buoyant: Fund groups were prepared to work remotely and willing to make real-time adjustments.
Using technology where it matters most
Over the past few years, the FV survey has been following the increased use of technology in the valuation function. Some fund groups introduced technological solutions over the past several months. It is notable that the implementation of new technology is the pandemic-induced change that most likely will remain a permanent part of the fund group’s valuation process, as noted by 14% of FV survey participants.
Fifty-four percent of FV survey participants indicated they are exploring new valuation-related technology solutions. Exploration is different from implementation, but we believe technological enhancements will continue in the form of quick-hit items that are lower-cost, easier to develop and implement, and based more on increased industry use cases.
It seems clear that there will continue to be technological developments affecting the valuation process. The work-from-home environment, even if it does not stay with us permanently, likely will cause at least a somewhat different approach and mindset to investment adviser operations, including the valuation function, and technology will likely be part of that evolution, just like it has been during the pandemic.
Proposed regulatory rules will require change
At the forefront, this year has been the pandemic and the market volatility it has created. Forty-seven percent of FV survey participants expect the pandemic will have the most significant impact and pose the biggest challenges over the next year. That is perhaps a surprise; however, regulatory developments and the thought of implementing a new rule often cause fund groups to raise a flare of distress. In April 2020, the SEC issued a proposed valuation rule, Rule 2a-5,1 titled Good Faith Determinations of Fair Value. Thirty-seven percent of FV survey participants indicated that it could have a greater effect on the valuation process than those caused to date by the pandemic.
How the final rule might read is anyone’s best guess, but one thing is very clear: The requirements of proposed Rule 2a-5 exceed the current practices and procedures in place today, and implementation would require fund groups to spend additional time and resources to comply.
Good governance equals active board oversight?
A main theme of proposed Rule 2a-5 is “active” board oversight. Current practices would change if the proposal is adopted as written, and some obvious examples were raised by many commenters, such as the required quarterly reporting and the in-between prompt reporting of certain matters associated with the investment adviser’s process. While 68% of FV survey participants provide quarterly reporting and 33% have requirements to report certain matters promptly to the board, the extent, form, and detail of the quarterly reporting and the form and timing of the prompt reporting may not perfectly align with proposed Rule 2a-5.
Not everything contained in the rule text of proposed Rule 2a-5 relates to requirements. It also contains suggestions that are aimed directly at boards. Many relate to information that boards might find helpful to review and that, according to the FV survey findings, many boards have been receiving for quite some time. What’s becoming apparent is that there is no one-size-fits-all model for board oversight, and anything that suggests a prescribed way to perform such a responsibility is likely to be met with skepticism.
Evaluating the pandemic period in trend analyses and in forecasting
Fund groups run many types of analyses that incorporate trend lines, whether they relate to the tracking of key valuation indicators for a dashboard or other more detailed analyses. Results during the pandemic have been volatile in many instances, representing anomalies in a data set. Whether and how to adjust analyses because of these anomalies will likely be a point of discussion and will certainly be more judgmental.
There is no doubt 2020 has been a challenging year and unlike any other we’ve experienced. Despite the human toll, we have learned, grown, and become more resilient as we uncovered strengths and weaknesses that will better inform our efforts to calm future storms. The strength of future storms will be unknown. However, good planning, risk management, leading technology, and data analytics, coupled with smart, talented humans leading the ship, will continue to be the best way to stay in control of the wheel and move in the right direction.
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Deloitte’s fair valuation pricing survey
Participants representing 101 registered investment company fund groups completed Deloitte’s 18th annual fair valuation pricing survey. FV survey participants included small, midsized, and large fund groups. About 15% managed mainly equities, 6% managed mainly fixed-income securities, and the remaining managed a balanced array of strategies. The FV survey was conducted in summer 2020.