Perspectives

How can mutual funds manage fair valuation complications?

Dashboard reporting summarizes critical data at a glance

When securities are highly liquid and trade regularly on exchanges, determining the value of those securities and striking a net asset value (NAV) for a mutual fund that holds them is a straightforward process. However, when systems fail, securities become illiquid, or regular trading is halted, fair valuation of securities can become complicated.

October 4, 2017

A blog post by Paul Kraft, Audit & Assurance partner, Deloitte & Touche LLP.

The first step to fair valuation is to anticipate the potential problems by cataloging them and developing valuation policies and procedures in the event that problems occur. The more comprehensive the coverage of these policies, the better; most importantly, however, these policies have to be known and followed by management and the operations staff. Mutual funds have to conduct periodic training on seldom-used policies, or risk overlooking them when needed.

To the degree possible, valuation plans should include redundancy and switchover capabilities for both processing and data support. This capability may fall under an extended-enterprise risk management program. Further, in the event that fund management receives conflicting information regarding valuation, controls should be in place to assess the situation objectively to support valuation decisions.

Because the world is such an unpredictable place, events are going to occur that are not in the procedures manual. In these instances, some firms are working with board members as events occur. At these firms, boards are becoming part of the solution process, as part of the plan.

Dashboard reporting—which summarizes critical data on a single computer screen—can be an effective tool to keep both fund management and boards abreast of valuation status and issues as they arise. And, some of the key valuation indicators (KVI) can provide predictive insight into emerging risks or issues.

Deloitte's Fair Valuation Pricing Survey, 15th edition

Read the report

Key valuation indicators offer insights

KVIs can be based on individual securities, markets and events, and operations to provide insight into the valuation landscape:

  • Securities-based indicators include credit rating changes, trading suspensions, mergers, and senior management changes.
  • Market events have a broader impact on pricing and include natural disasters, geopolitical instability, and government actions. These KVIs comprise the events that drive securities prices to make larger-than-ordinary moves.
  • Operational KVIs focus on the stability and confidence of the pricing on a day-to-day basis. They cover such factors as the percentage of the portfolio covered by multiple price sources, the divergence of prices, the percentage of stale prices, the number of price changes outside of threshold, the impact of price source change, and the percentage of the portfolio utilizing a fair valuation factor.

Investment management firms that have defined and measurable KVI dashboards may be able to anticipate price uncertainty. They will also likely be able to make informed decisions faster, facilitate proper input from key stakeholders, and have more confidence in their fair valuation factors and adjustments than those with less-developed capabilities.

Investment management firms are managing the operational risk associated with pricing and fair valuation more effectively as time passes, but issues and decisions will continue to require attention. Are your firm’s valuation capabilities on par with the rest of the industry? What are the major issues you are facing with regard to fair valuation? See the executive summary of Deloitte’s Fair valuation pricing survey, fifteenth edition for more detail.

Investment management firms that have defined and measurable KVI dashboards may be able to anticipate price uncertainty. They will also likely be able to make informed decisions faster, facilitate proper input from key stakeholders, and have more confidence in their fair valuation factors and adjustments than those with less-developed capabilities.

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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