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Elizabeth Krentzman, Principal, Deloitte & Touche LLP

Mutual fund valuation processes hold steady, says Deloitte study

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Mutual fund valuation policies and procedures successfully withstood unprecedented market volatility caused by economic uncertainty, unrest in the Middle East and environmental disasters, according to Deloitte’s "Ninth Annual Fair Value Pricing Survey."

 
"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," says Cary Stier, vice chairman, Deloitte LLP and asset management services leader. "They knew what to do and how to monitor unique situations. As evidence of that, our survey further shows that 35 per cent of participants made no changes to their valuation policies this year, more than double the 15 per cent reporting no changes last year."

While valuation policies and procedures may not have changed dramatically, the record number of survey respondents suggests that fair value continues to be important to fund groups and their boards. Many participants say they made minor changes to their policies and procedures, indicating that they understand the need to amend or to supplement current policies and procedures to address lessons learned from the past and to respond to future risks.
 
"When you build it well, it’s built to last," says Elizabeth Krentzman (pictured), Deloitte US mutual fund practice leader. "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."
 
Internal controls and governance activities remain focal points, with key survey findings including:
 
Secondary Pricing – More than 60 per cent of survey participants undertake daily comparisons of equity pricing from a primary source to a secondary source; the figure drops to less than 30 per cent for fixed income securities.
 
Price challenges – 20 per cent noted that price challenges resulted in a change in valuation more than 50 per cent of the time.
 
Real-time involvement – More than 20 per cent of respondents indicate that their policies and procedures identify situations that require 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," says Rajan Chari, partner, Deloitte & Touche LLP and the Fair Value Survey leader. "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 per cent drop in fund complexes using the bid price exclusively to value fixed income securities, while those using the mean price exclusively has moved up to 36 per cent. This is a substantial change that likely underscores the impact the credit crisis had on valuation policies and procedures."

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