Majority of Funds Use Pricing Service for Foreign Securities, Says Survey
Think you donít have to worry about pricing issues because you donít run a mutual fund? Think again.
All advisers need to make sure they accurately price securities held in client portfolios to ensure that numbers derived from those valuations, such as advisory fees, investment performance, and even the firmís assets under management, are calculated correctly.
Even if you donít have to calculate daily NAVs, "youíre still going to be paid based on a value," said Deloitte & Toucheís Paul Kraft. "Itís important that you apply fair value techniques."
In a recent survey of 63 fund groups, Deloitte found that 68 percent use a third-party pricing service for foreign securities. That, said Deloitte, represented "a staggering increase" from the 21 percent reported in the firmís 2003 survey. Other findings:
37 percent of the respondents said that they had reduced their fair valuation trigger over the past year, with the average trigger decreasing from 2.25 percent in 2003 to 0.73 percent in 2004.
40 percent said they wait to review stale prices after five days of no pricing changes. Only 18 percent said they perform an analysis on stale pricing every day.
Roughly two-thirds said their policies specifically define market fluctuations.
51 percent said they revised their fair valuation policies and procedures "in a meaningful way" over the past year.
44 percent said they were examined by the SEC in the last year. Of those, half said that examiners commented (formally or informally) on their fair value policies and procedures, focusing on foreign, small-cap, and high yield securities.
Kraft noted that both of the major pricing vendors (ITG and FT) have evaluated the small cap area. "I donít think theyíve come to any conclusions yet," he said. He noted that as a result of indexing, there is "less of a chance" that there will not be a market price for small caps.
The biggest fair valuation issue in many firms continues to be getting that "internal comfort" that fair valuation is appropriate, Kraft said. Historically, he noted, firms had an "incredible amount of concern" about moving from market price to an evaluated equity price.