IMAS and Stradegi publish fair valuation guide

16 June 2017   Category: News, Asia, Global, Singapore   By Asia Asset Management

The Investment Management Association of Singapore (IMAS) and Stradegi Investment Management Consulting (Stradegi) have released proposals to help the investment management industry reduce the risk and costs of handling fair valuation during unexpected market events.

Entitled Fund Management Fair Valuation Best Practices, it provides a standardised fair valuation guide for funds that invest in exchange-traded equities and fixed-income instruments, they say in a joint statement on June 15.

Gustavo Bernal Torres, a business consultant at Stradegi, tells Asia Asset Management that after having faced market disruption events in 2015 and 2016, the research paper came about as a collaborative initiative between Stradegi, IMAS and a group of asset managers that wanted to establish and share best practice in fair valuation. Participating COOs wanted to establish guidelines to mitigate risk and better prepare firms for future market disruption events.

The paper proposes best practices in appropriate governance, price sourcing, valuation monitoring and fair valuation methodologies, ensuring standardised fair valuation for investors.

“Market disruption events and extreme volatility have direct consequences on valuation. Not having readily available or reliable market prices to value funds, usually lead to an operational crisis, placing a high risk on the firm and its investors,” explains Mr. Bernal Torres.

Singapore-based Stradegi says there are different approaches to handle fair valuation in Asia. Some of the differences are related to governance, the organisation structure supporting the valuation process, fair valuation triggers, and the definition of proxies and reporting.

According to IMAS Chairman Nicholas Hadow, honest and fair price discovery is one of the key purposes of well-functioning markets.

“Market bubbles, technical glitches, liquidity issues and even ‘Black Monday’ type capital market disruptions are thankfully rare but they present significant challenges in quantifying the fair value of assets,” Mr. Hadow says in the statement. “What makes that more daunting is that there are currently no common set of industry best practices.”

Stradegi held meetings with large investment management firms to discuss how to handle fair valuation in different scenarios, such as trading halts, market disruptions, and crisis events.

The meetings involved heads of valuation of global and regional investment management firms based in Asia that have AUM ranging from US$20 billion to $500 billion, according to the statement.

When asked what the main challenges were in preparing the paper, Mr. Bernal Torres says: “The paper compiles fair valuation best practices after meeting with several asset managers, pricing vendors, fund administrators, and industry associations. A major challenge was amalgamating and communicating the different approaches from all the contributors and agreeing on which approach best met the requirements of investors and regulators.”

He continues: “In Asia, asset managers don’t have a standardised approach towards fair valuation. When we started talking to asset managers, it was interesting to see the different approaches followed by each valuation team. However, we have now collected some guidelines for other industry players to be better prepared for future market disruptions.”

Finally, when asked if there are any areas in particular that firms in Asia need to pay closer attention to when it comes to handling unexpected market events, Mr. Bernal Torres responds: “Asset managers need to establish two key elements in a fair valuation framework. Firstly, a governance structure that ensures fair and independent valuation for investors, with a strong focus towards risk mitigation and avoiding conflicts of interest. And secondly, an operating model to conduct fair valuation in a timely and efficient manner. Specially focussing on pricing sources, valuation monitoring, methodologies, and process review.”