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Isn’t It Time To Get On Board With NAV Validation Automation?

By Henri Berthe, Product Manager, Linedata


Despite the advances in technology, it is surprising that numbers are still being crunched manually in certain key fund management operations. This is certainly the case with the validation of net asset value (NAV) calculations, which are the cornerstone of fund pricing. However, a string of high profile errors in the US coupled with an increasingly competitive and complex environment has underscored the need for automation of this crucial task. Isn’t it time to get on board with NAV validation automation?

NAV validation workflow for many fund management groups is typically a labour intensive exercise where teams of people pore over Excel spreadsheets. Altogether the process can take up to two hours starting with the extraction of NAV from the accounting system to the preliminary checks, printing and reviewing the reports, identifying any errors, analysing and spotting discrepancies to the final NAV approval.

As with any human input, mistakes are made and they do not have to be major to be reported to the regulators. They tend to emanate from old or inaccurate data, spurious calculations or overlooked operations processing; common examples include an incorrect foreign exchange valuation, a missed corporate action or a fair valuation issue. Implementing an automated system not only dramatically reduces the time it takes to complete the process but also cuts down the room for errors.

The result is that fund managers can focus more on their core competencies and investment decisions which have becoming increasingly complex. Generating returns in the current prolonged low interest rate environment has led firms to casting their nets wider into different asset classes and fund structures. However, instead of hiring extra people to cope with the additional workload, for example, of evaluating 300 to 500 funds, new technology can be installed to streamline the process.

Technology is just the ticket

Although enhanced and adapted to today’s world, many of the technologies have been around in a basic format for some time. One reason the buy side has been slow in implementing new solutions is due to the lack of regulatory impetus. Unlike many sections of financial services, there are no significant reforms  - yet this is a major area of focus for regulatory bodies and the situation could change in the future.

Europe seems farther ahead of the curve with the Alternative Investment Fund Management Directive, UCITS IV and UCITS V embedding fund managers’ responsibilities regarding portfolio oversight within the operational risk requirements. Meanwhile the UK’s Financial Conduct Authority is putting the onus on fund managers to take greater responsibility for their third-party service providers including those which calculate NAVs.

In the US, the main piece of legislation remains the Investment Company Act of 1940 which suggests fund managers are responsible for providing accurate NAVs but offers no guidance. There is also nothing set in stone at the Securities and Exchange Commission but it will take action if investors have been impacted by errors incurred. One of the most notable cases involved a US-based investment firm which was fined US$200 million for misrepresenting and overstating the value of certain mortgage-backed investments during the housing collapse. This resulted in 39,000 investors across the country losing $1.5 billion. The threat of SEC enforcement served as a catalyst with a survey conducted by Deloitte in 2013 showing that 78% of the 96 mutual funds surveyed have changed their policies and procedures.

Inaccurate NAV calculations may not only lead to a hefty fine but also a damaged reputation as investors have increasingly demanded greater transparency and accountability. Moreover, the compensation that may have to be paid out as well the recalculations of the NAV numbers and potential redemptions is likely to be a time consuming and costly exercise.

Cover your Tracks

The pressures on fund managers are only set to increase as the trend to provide NAV calculations throughout and not just at the end of the day gains momentum. This is particularly the case in the US where currently mutual funds and Unit investment Trusts (UITs) must calculate their NAV at least once every business day, typically after the major domestic exchanges close. The theory is that intraday pricing will enhance risk management procedures because it is easier to identify a problem within an isolated group of transactions rather than an entire day’s trading.

The challenges of publishing this information can be found within the European community where funds have a wide range of investment options and share classes. Many offer intraday pricing which means calculating several NAVs throughout the day for a single fund. There is also the need to carry out oversight on the way these different share classes are being hedged as well as running various important daily risk and liquidity controls.Implementing an exception based software solution highlighting any discrepancies across key areas of portfolio oversight including valuation, pricing, risk and liquidity in an automated way not only is a more cost effective solution but also helps to mitigate the risks and improve productivity and service quality.

There are integrated solutions on the market that offer real time portfolio oversight across a number of critical areas including portfolio and security valuations, NAV variation, accounting, liquidity, tax, fees as well as incorporating investment compliance monitoring  along with full historical data capture and audit trails. Systems, though, need to be flexible enough to adapt to the inevitable regulatory and market condition changes over time. The NAV validation automation train is boarding — don’t be left at the station.

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For more information, please contact:
Holly Clifford
Global Marketing Product Manager - Asset Management
Tel: +1 617 912 4844