In today’s uncertain times and remote-work environment, robust oversight and business continuity is an imperative, not a luxury
In recent years, NAV delivery failures by fund administrators have highlighted the legal, financial, and reputational risks inherent in outsourcing NAV production. Market volatility in the wake of COVID-19, and the widespread remote working that has followed, have further underscored the challenges posed by outdated, manually based oversight and contingency processes.
As regulators take a harder look at operational resilience, offshoring and related risks, and the robustness of Business Continuity Plans, vendors have inundated the market with products claiming to help Asset Managers and Management Companies streamline NAV Oversight and perform Contingent NAV calculations. Not all solutions are created equal, however, so it is important to educate yourself to select the right fit for your business.
Broadly speaking, there are four main ways of calculating an alternative NAV to the one provided by your fund administrator or fund accounting department:
Spreadsheets represent a low upfront cost but are complex to maintain and control. They increasingly present an unacceptable level of operational risk.
Benchmark NAV solutions (also known as Indicative or Backup NAV) calculate an estimated NAV using algorithms to examine a comparable index and perform a ‘top-down’ statistical analysis that approximates market, currency, derivatives, fees and other impacts, with varying levels of accuracy.
Contingent NAV solutions start with the prior NAV and independently process and produce the data factors that drive changes to your NAV. They enable you to issue an accurate, updated NAV even if your supplier suffers an outage.
Shadow NAV solutions involve maintaining a duplicate book of records. This is the most accurate approach but is also labor-intensive and costly. Few Asset Managers, outside hedge funds investing in illiquid assets, choose to do this given the current regulatory environment.
"Deciding whether you need to implement a Contingent NAV solution largely depends on your risk appetite."
Do I need a Contingent NAV solution?
The lack of suitable backup alternatives can leave you exposed to several forms of risk.
Compliance risk: Firms increasingly face regulatory mandates to ensure accurate, up-to-date NAV calculations. In Europe, UCITS and AIFMD require Asset Managers and ManCos to implement Business Continuity Plans (BCP). Such firms cannot delegate their accountability for releasing timely and accurate NAVs, even if they delegate responsibility for NAV production. The FCA Senior Managers Regime in the UK implies that Senior Managers can be held personally liable for NAV calculation breaches if the FCA determines they failed to conduct adequate due diligence or take reasonable preventative measures. In the US, the SEC has proposed (but not yet implemented) an update to the US ’40 Act that would make independent valuation oversight mandatory and require BCP for service providers to ensure NAV production continuity.
Reputational risk: Access to fund distribution platforms helps drive the asset management business. Managers whose NAV values are consistently late or inaccurate face potential exclusion from distribution channels. Even if their platform access is not affected, the reputational cost of calculation failures can hurt investor confidence, with damaging results.
Financial risk: Many factors, including the potential cost of NAV production failures, go into evaluating the business case for alternative NAV calculation solutions. Points to consider include the total cost of running a manual solution and the risk (and potential cost) of human errors; the cost of implementing and running multiple solutions versus a single automated solution, as well as the impact of breaches on distribution and reputation.
Once you decide you need a Contingent NAV solution, the next challenge is finding the right one for your requirements.
The Fund Oversight Challenge: Helping asset managers meet their NAV oversight, ESG, and data management obligations
Choosing the right solution
When choosing a Contingent NAV solution, here are five considerations to keep in mind:
Accuracy. If you issue a price, you assume legal responsibility for its accuracy and will need to compensate investors or the fund for errors. Be sure the solution you choose delivers the necessary level of accuracy for your requirements.
Effort to run. More granularity does not necessarily mean more effort to run. There are fully automated solutions on the market. Look at total cost of ownership (TCO), including implementation and running costs, especially if there are manual steps in your process.
Value added. Does the solution simply provide an indicative NAV, or does it allow you to hold your Administrator to account by alerting you to specific items that need challenging? Does it support NAV Oversight while also enabling you to issue the NAV in an emergency?
Independence. Some TPAs offer alternative NAV calculation systems as part of their service. While seemingly cost-effective, such solutions might compound your risk by relying on the same technology the TPA uses to calculate your NAV. They might also present a conflict of interest if disputes arise over accuracy or potential liabilities. If you use multiple TPAs, you will need a solution that can consolidate and compare data between administrators.
Ease of switchover. In the case of a systemic failure, time is of the essence. Contingent NAV solutions should let you seamlessly issue a NAV should the need arise, rather than needing to perform oversight checks on estimated numbers and then reimporting data to calculate the NAV.
"Asset Managers and ManCos face an abundance of choice around Contingent NAV solutions. Reputations take years to build but can be destroyed in a matter of moments."
Clearly, Asset Managers and ManCos face an abundance of choice around Contingent NAV solutions. Reputations take years to build but can be destroyed in a matter of moments. Having robust contingency measures in place is critical. Be sure you are protected legally, financially and reputationally in case of unforeseen events. Whether you are considering NAV Oversight, Benchmark NAV, Contingent NAV, or a fully outsourced Shadow NAV solution, Linedata can help.
About the author, Matt Grinnell
Matt Grinnell is global product manager for Linedata software solutions, including fund oversight and compliance. A seasoned industry veteran, Matt’s focus is driving vision and strategy, working closely with clients and industry participants to discover and develop initiatives that grow customer value. Before joining Linedata, Matt worked at Fidessa for over a decade, where he was responsible for global product management and marketing of portfolio compliance and regulatory controls solutions. Prior to that he held compliance leadership roles at Putnam Investments and Fidelity and specialized in assessing the impact of new regulations and evaluating industry trends in risk and compliance.
NAV Oversight and Contingent NAV solutions
Volatile markets, remote working, and regulatory focus have exposed the risks posed by outdated NAV controls. If it’s time to rethink your NAV Oversight or Contingent NAV, think Linedata Navquest. It streamlines, standardizes, and automates daily checks of Net Asset Value calculations, providing clear metrics and reporting for audit, board, and regulatory purposes.