Markit, a specialist in valuations and post-trade processing for swaps and other non-exchange traded products, has launched a service to help US mutual funds and other institutional investors find a fair value for their bonds.

Markit Fair Value is designed to help mutual funds comply with the Investment Company Act which requires them to calculate their net asset value using an estimated “fair value” of securities when a market quotation is not readily available, according to the firm. That occurs when a security’s primary market is closed .

Markit joins industry leaders Interactive Data and Investment Technology Group in providing a fair value pricing service, but Markit lays claim to being the first for bonds. The new Markit Fair Value service will cover over 80,000 sovereign and corporate bonds from issuers in North America, Europe and Asia Pacific. Interactive Data, a reference data and evaluations firm and Investment Technology Group (ITG), an agency brokerage, specialize in non-U.S. equities.

Mutual funds typically calculate their net asset value once a day at 4PM EST based on the closing trades of each security in a portfolio. However, those prices are often out of date for funds investing in foreign securities because of time-zone differences. Short-term trading based on those time-zone differences can seriously impact the profit margins of a mutual fund and pose a disadvantage to longer-term investors particularly in Asia-Pacific centric funds whose prices are closely pegged to the U.S. market.

The Securities and Exchange Commission does not dictate how US mutual funds should  fair value their assets, leaving some room for interpretation. Interactive Data says it relies on a process called multifactor regression to price a non-U.S. security. By contrast, ITG uses six pricing models, each representing a different factor such as the S&P 500 futures, exchange traded funds and sectors. Instead of combining many factors to adjust the fair value, the firm selects one factor based on historical performance.

Markit says its methodology for bonds depends on a statistical relationship between bond prices and over 30 different market, entity-specific and momentum factors to adjust value at the individual bond level.

"With Markit Fair Value, fund managers benefit from an independent and scalable solution that helps them standardize how they value bonds and investors benefit from a share price that contains the most timely pricing information available," says Armins Rusis, managing director and global head of data, indices and research in a statement issued by Markit on Thursday.

Chris Kentouris writes for Securities Technology Monitor.



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