A little more than a decade ago, when Deloitte put together its first fair valuation survey, our goal was to help mutual funds benchmark their valuation policies and procedures against others in the industry, as well as to highlight the different approaches we saw. Based on the initial flurry of responses we received, we realized we had hit on something unique.

As we now celebrate 10 years of conducting the survey, this year's participation has grown to more than 80 mutual fund firms, representing more than $5 trillion in assets under management.

Throughout the years, Deloitte's asset management practice has been compiling, analyzing and discussing industry valuation trends with mutual fund executives, boards of directors, regulators, and many more to help identify leading practices and emerging approaches.

Last week, we released the results from the tenth edition of our survey, an anniversary that caused us to reflect on what has occurred over the past decade.

While our survey findings have changed over the years, most telling is what didn't: Valuation never wavered as a top issue for mutual funds. What's more, they show just how far the industry has evolved.

The industry's persistent focus on valuation is as much a story about the impact of external developments as it is about firms trying to get ahead of the next unforeseen event. The industry has been forced to face a number of unusual and largely unexpected developments; equally influential has been the U.S. Securities and Exchange Commission's continuing focus on valuation over the last 10 years.

So, as we look back on our survey findings, a number of key themes emerge, in addition to advances in governance activities and valuation controls:

* An increasing focus on foreign securities. Nowhere have valuation practices appear to have evolved more than when it comes to foreign securities, an area firms pretty much completely reengineered over the first six years of the survey. In 2001, only a few of the firms surveyed said they adjusted valuations for foreign securities prior to their nightly NAV calculations. These days, nearly all actively consider such adjustments, whether they are done daily through the use of zero triggers, by performing an analysis upon exceeding established thresholds, or through internal correlation analysis.

* Greater participation by third-party pricing vendors. Over the past 10 years, vendor interactions have moved from direct valuation inputs to an evaluation of a vendor's suggested pricing indication. At the same time, mutual fund firms have built up their related control processes and procedures. Today, firms are more likely than at the survey's inception to make adjustments or issue challenges to third-party valuations, as well as to conduct site visits of pricing vendors. In addition, pricing vendors now provide access to technical inputs and assumptions for a number of asset classes (including collateralized debt obligations, commercial mortgage-backed securities and derivatives), providing additional resources for fund firms.

* Firm size less of a factor. In the survey's early years, firms with more than $75 billion in assets under management were more likely than their smaller counterparts to have formalized valuation policies and procedures along with the associated infrastructure. Over the years, that gap has narrowed. While no one size fits all, smaller firms have stepped up their efforts in many valuation areas, including valuation committees at the fund board and management level, follow-up activities assessing the impact of fair valuation decisions on valuation procedures, and the frequency with which they adjust valuations in the event of a "significant event."

Over the next 10 years, fund firms will be expected to continue refining their fair valuation practices and procedures, especially as external events inevitably force the industry to react. But we also believe the industry is moving to a new era that involves taking proactive measures on valuation. In the future, firms may increasingly embed valuation topics in their risk-management regimes to the point where identifying valuation-related risks may become as commonplace as assessing operational or strategic risks.

As a result, firms appear to be getting a much better handle on determining whether their existing procedures, internal controls and governance activities are effectively addressing valuation risks. As these approaches develop, we expect firms to look for better ways to employ technology, where advances may likely pave the way for new valuation capabilities and higher levels of precision.

Another decade from now, we're confident that our next survey retrospective should find the industry just as focused on valuation as it is today.

Stakeholders and regulators will demand it and-more importantly-mutual fund firms and fund boards will drive it. We will capture and share the valuation data points and trends that will help the industry get ahead of the many changes that are likely to come.

Paul Kraft, a partner with Deloitte & Touche and former assistant chief accountant at the U.S. Securities and Exchange Commission, is the co-author of Deloitte's fair valuation survey.


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