Deloitte Survey: U.S. Downgrade Edges Sovereign Debt Concerns in Mutual Fund Valuation Discussions; Will Eurozone Worries Intensify Focus?

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Oct 01, 2012, 10:57 ET

NEW YORK, Oct. 1, 2012 /PRNewswire/ -- In a year characterized by a number of dramatic developments globally, it is a rating agency's downgrade of the United States government's credit rating that drove the most valuation-related discussion among mutual fund management and board directors outside the boardroom, according to Deloitte's 10th annual fair valuation survey.

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"With continuing Eurozone worries, we believe the focus on valuation by fund management and fund boards will only increase in the coming months," said Elizabeth Krentzman, the leader of Deloitte's mutual fund practice and a principal with Deloitte & Touche LLP. "Mutual funds have more than a strong interest in making sure they get their fair value pricing right. The challenges of a 24-hour global market landscape and less liquid investments give funds ample opportunities to sharpen their processes and we expect to see further trending in these areas in the years to come."

At 49 percent, the U.S. debt downgrade narrowly eclipsed sovereign debt concerns (42 percent) among the five events listed in the survey.

Deloitte's survey focuses on mutual funds' policies and procedures around fair value pricing of investments. Each business day, a mutual fund must determine the value of each portfolio security it holds in order to set what is known as a "net asset value per share." This calculation is subsequently used to process purchases, redemptions, and exchanges by shareholders.

One-in-four of the mutual fund firms surveyed indicated that they had both increased the use of automation and added headcount in the valuation process over the last year. All told, almost three-quarters (71 percent) noted they made changes to their fair valuation policies and procedures. The bulk of these, according to the survey's authors, were refinements of their valuation efforts.

Among other findings:

Fund managers are keeping a close eye on Europe, China and larger macroeconomic trends: 43 percent and 48 percent of survey participants reported applying fair value policies to review for significant events for foreign corporate debt and sovereign debt, respectively, an increase from 2011.
With the U.S. Securities and Exchange Commission requesting information from a number of mutual funds about their pricing vendor practices, more than one-quarter of respondents (29 percent) indicated they updated their onsite due diligence process in response.
In a jump from last year, 77 percent of survey participants said they compare equity prices received from their primary pricing source to a secondary source each day.
With risk management being at the forefront of the minds of both management and fund boards, nearly half of survey participants – 48 percent – said their fund group has identified the risks associated with the valuation of individual investment types (versus investment risks more generally) as part of their risk assessment process. All but 5 percent said that they had one or more controls in place to help reduce the likelihood of each risk occurring.

"Since we began the survey a little more than 10 years ago, we have seen an increase in the availability of market data each and every year," said Rajan Chari, a partner with Deloitte & Touche LLP and a co-author of the survey. "Greater transparency – often available on a real-time basis – has permitted fund groups to better understand the risks not only associated with their domestic positions, but also those in Europe and beyond."

"Consequently, one of the biggest challenges we see right now is around that firehose of available data," adds Chari. "The questions that fund management is asking themselves now are more along the lines of 'what do we do with all of it?' and 'how do we make sure that we do not miss or ignore what it tells us?'"

Deloitte's 10th Annual Fair Value Pricing Survey aggregates the views of 87 mutual fund firms who advise more than 3,300 individual funds and include some of the largest firms in the U.S.; those surveyed hold more than $5 trillion in assets under management. The population of survey participants represents a diverse mix of asset managers encompassing various sizes, asset classes, and geographies. The survey took place between June and August 2012.

About Deloitte's Asset Management Services Practice
Deloitte's asset management practice serves 19 of top 20 global asset managers and has a strong reputation built through its work with a roster of blue-chip clients, many of which it has served for more than 30 years.

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