Fair Value Pricing
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| Date: | April 2009 |  |
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| Author: | Richard Phillipson | ||
| Price: | £750 to non-members of the Investit Intelligence Member service | ||
This project was driven by demand from clients who are finding that the increasingly opaque and illiquid market conditions are causing operational problems, mainly with bond funds. This FVP project will examine the priority issues, describe current approaches and define sound practices. |
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Fund managers are required to value investments using a reputable source and are obliged to review their reliability. This has become a live issue because:
- Equity markets and market data have fragmented.
- Bond markets have become less liquid.
- Property transactions give valuers less evidence to work with.
- Markets have become more volatile and so prices can be considered stale more quickly.
- The assumptions about inputs to valuing OTC derivatives are more open to question.
- SORP and a firm’s commercial interests sometimes differ.
- Better information is available, than is being used (more expensive to gather or calculate).
Against this background managers must Treat Customers Fairly to arrive at portfolio valuations that give a fair estimate of current value. For collective schemes it is important that those leaving do not disadvantage those staying in funds.
Since the Winter Conference, in January 2009, we have held two FVP workshops. The first of these was called ‘Towards Practical Responses’. We set out the key issues in single line pricing for bonds, OTCs, funds and property and how these might be addressed. The second workshop concentrated on data and bond indices where a number of solution providers were invited to show participants their products.
Table of contents
| 1 | Introduction | 1 | |
| 1.1 | Methodology | 3 | |
| 1.2 | Definitions | 4 | |
| 1.3 | Regulation and accounting standards | 7 | |
| 1.4 | Fair value hierarchy | 8 | |
| 1.5 | Data | 9 | |
| 2 | Single Line Fair Value Pricing | 13 | |
| 2.1 | Bonds | 14 | |
| 2.2 | OTCs | 18 | |
| 2.3 | Equities | 20 | |
| 2.4 | Funds | 22 | |
| 2.5 | Property | 24 | |
| 3 | Whole Fund Pricing | 27 | |
| 3.1 | Actions | 28 | |
| 4 |
Funds Flow Bid and Offer Pricing | 29 | |
| 5 | Governance and Invoked Fair Value Pricing | 31 | |
| 5.1 | Pricing policy | 32 | |
| 5.2 | Invoked Fair Value Pricing | 34 | |
| 5.3 | Agreeing the Fair Value Price | 36 | |
| 6 | Appendix: OTC Pricing and Valuation Workshop - December 2006 | 37 | |
| 6.1 | The challenges of OTC pricing | 37 | |
| 6.2 | The challenges to OTC valuation | 38 | |
| 6.3 | Who is involved/interested? | 39 | |
| Sources, Further Reading and Index | 41 |
- Press release - Investment managers identify their key priorities
- Press release - Investit and Stone House Consulting announce a strategic partnership
- Press release - Investment managers identify their priorities for the year ahead
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