Administration April 4, 2005

Fair Valuation of Foreign Securities by Third-Parties More Common in 2004

April 4, 2005 (PLANSPONSOR.com) - Mutual funds are increasingly turning to third-party vendors to do fair valuation pricing for foreign securities, a move that will likely make them less prone to market-timing arbitrage.

Reported by

Kip McDaniel

According to the fourth annual Deloitte & Touche survey on fair value pricing, 68% of mutual fund groups now use third-parties to calculate fair values for foreign securities, up from 21% last year. Also, 51% of such groups have modified their policies and procedures “in a meaningful way” over last year in regards to fair value adjustments, according to the company.

Larger funds (over $75 billion in assets under management) were more likely to have independent pricing vendors, with 100% stating they used such services or were in discussion with such vendors. By comparison, only 66% of those under $75 billion used third-party vendors.

Inadequate pricing of securities can lead to market-timing arbitrage, and thus the move towards increased vigilance in this area should come as good news to investors.

The study also noted that the SEC is increasingly taking a closer look at mutual fund fair valuation pricing. Forty-four percent of respondents to the survey said that they were examined in 2004, up from 30% the year before. Half of those polled said that the federal regulator either formally or informally commented on the sufficiency of their fair clue pricing policies and procedures. The focus, according to those polled, was on foreign, small-cap and high yield securities.

The study also shows that funds are attempting to implement policies that address market fluctuations and their effects on security valuations, with 66% claiming that they have such policies in place. Such measures seem to be having an effect. Over half of those polled reported a decrease in market timing activities related to market fluctuations in the past year. Over one-third defined the decrease as significant.

Participants also indicated that they have reduced their triggers over the past year, with the year-to-year average trigger falling from 2.25% to 0.73% in the past twelve months.

The 2004-2005 Fair Value Pricing Survey looked at 63 fund groups with over $3 billion in assets under management.