Mutual funds’ fair value procedures are holding up amid the unprecedented market volatility that has resulted from economic uncertainty, Middle East unrest and environmental disasters, Deloitte found in its Ninth Annual Fair Value Pricing Survey. This year’s survey queried executives at 79 asset management firms around the world with more than 3,300 fund offerings with $2.6 trillion in assets under management.
Thirty-five percent of firms made no changes to their fair value policies in the past year, up from 15% the year before, Deloitte found.
“When faced with recent events that added significant stress to global markets, our survey indicates that mutual funds are well prepared to handle investment valuations,” said Cary Stier, vice chairman of Deloitte and leader of the asset management services practice. “They knew what to do and how to monitor unique situations.”
Elizabeth Krentzman, Deloitte U.S. mutual fund practice leader, added: “When you build it well, it’s built to last. Knowing this industry as well as we do, we aren’t surprised that not a lot of tinkering was required over the last year. In an already highly regulated environment, mutual fund firms are accustomed to updating their valuation procedures and practices when needed, such that they got to a good place that worked over the last year.”
For equities, more than 60% of participants in the survey said they use both a primary and a secondary pricing source. For bonds, 30% use two sources.
Twenty percent said that pricing glitches led to a change in valuation more than half the time. Another 20% said their policies require the involvement of a fund director prior to valuation.
“Fixed income instruments—traditionally valued differently than equities due to their relative illiquidity—were a challenge during the credit crisis,” said Rajan Chari, a Deloitte & Touche partner and leader of the Fair Value Survey. “Although we did not see a dramatic change in fixed income valuation practices from our previous survey, we took a slightly longer-term look and noticed a 20% drop in fund complexes using the bid price exclusively to value fixed income securities, while those using the mean price exclusively has move up 36%. This is a substantial change that likely underscores the impact the credit crisis had on valuation policies and procedures.”
