A timely and accurate valuation is one of the highest priorities for investment managers. Both investors and regulatory authorities such as the Securities & Exchange Commission (SEC) are keenly interested in the way investment firms calculate fund value. Valuation data is used to calculate net asset value (NAV), and errors can lead to misstated returns, incorrect purchase or redemption values, and negative tax consequences, among other horrors.
From a firm’s perspective, NAV determines not only purchase and redemption prices but the management fees that investors pay. The SEC scrutinizes valuation data through regulatory filings, as well as investigations and other measures when merited, to ensure that investors are protected against fraud and manipulation. Should the SEC take issue with valuation measures, firms could suffer from an array of enforcement actions including penalties, fines, suspension, or worse.
Third-party valuation specialists are only one contributor to an accurate NAV
Many investment firms hire third-party valuation specialists to conduct valuations and verify NAV. There are certainly benefits to doing so: such firms typically have extensive valuation experience and employ best-in-class practices. Most importantly, as outsiders, they offer a level of independence that suggests unbiased results.
But not every firm needs to take the expensive step of retaining an outside valuation expert, particularly those who do not invest in illiquid assets or assets whose values can be subject to broader interpretations of value. Choosing the right post-trade processing software can lead to more robust valuation results.
Post-trade processing software can play a strong role in the valuation process
For any investment manager to value funds under management, it’s essential to understand the trading activity, the portfolio(s) in terms of total cash, trades and currencies on a specified date, and the fund’s fee structure. Trading activity should be viewed from the vantage point of the profit or loss incurred, taking into account commissions and fees. It’s more than net proceeds and must include all payouts to brokers and providers. The output needed for valuation, a profit and loss statement, should come in the form of a report that breaks down trading fees every month.
To produce accurate valuations efficiently, it’s necessary to collect, aggregate, and analyze data from multiple sources. Firms need a software solution that can ingest data quickly and normalize it efficiently for processing and NAV calculation. With a high-quality post-trade processing solution, it’s easy to provide clients with accurate valuations on a quarterly, monthly, or even weekly basis.
Trade breaks are a pernicious source of risk to valuation
Any time you distribute valuation data to clients, it’s essential to ensure that the information you’re providing is correct. Trade breaks can pose a significant threat, and in large firms, they can happen daily. If they’re not rectified, there’s a significant risk that the valuations disseminated to clients could be incorrect. Post-trade processing solutions that offer trade matching can identify and help rectify trade breaks efficiently, thus leading to significantly more accurate valuation results to deliver to clients.
The right software can reduce risk by increasing the accuracy of valuations
As markets evolve and firms grow, investment firms are likely to add new managers and products and expand into new markets. While opening new accounts is a desirable state of affairs, the process of onboarding a high volume of new accounts can be onerous, and potentially put a strain on the post-trade process. The best post-trade processing solutions are highly scalable and can easily connect to new data sources for efficient onboarding. System breakdowns in onboarding can cast a pall over important new business relationships and hinder growth just when you most need processes to run smoothly.
A robust post-trade processing solution can impact a firm’s business in myriad ways, by automating tasks, ensuring accuracy and consistency, and facilitating analysis. Perhaps most importantly though, the right choice of post-trade processing software can help reduce costs and risks, both financial and regulatory, by ensuring more accurate valuations.
About the Author
Rebecca Baldridge, CFA, is an investment professional and financial writer with more than 20 years of experience in creating content and research for asset managers, investment banks, brokers and other financial services clients. She’s worked for some of the biggest names in the industry, including Merrill Lynch Asset Management, JP Morgan Asset Management, BNY Mellon and Franklin Templeton. Rebecca also spent 9 years as an analyst and director of equity research in Moscow, working for several Russian banks. In late 2019, she founded Quartet Communications, a boutique communications firm serving financial services clients. Her writing has been published in outlets including Pensions & Investments, MSNBC.com, Inc. magazine, and Investopedia.com. She holds a B.A. in Russian from Purdue University and an M.S. in Finance from the Krannert Graduate School of Management at Purdue.