Research reveals managers’ influence on fund valuations

Researchers from two universities are to publish research shortly that says managers of open-ended funds influence their vehicles’ valuations. A team comprising Colin Lizieri of Cambridge University, and Neil Crosby and Pat McAllister of Reading University, is expected to expand on a view that they published in a draft paper last autumn.

The draft paper said: “Appraisal-based capital return of open-ended funds fell further than for other client types during the period June 2007 until December 2008. “Capital values for open-ended funds fell by 2% more than the overall movement of funds in the IPD index.”

The paper also said: “The requirement for open-ended funds to meet redemptions was a strong incentive to ensure that their asset values were marked down to the market.

“Appraisers were in a difficult position, since the decline in transaction activity meant that they had little evidence of market pricing levels.”

Some fund managers would like to modify the way open-ended funds are valued to try to avoid the liquidity problems that both quarterly and daily priced funds have suffered in the past two years.

ArbreIM, the new property investment management business set up by Arbuthnot Banking Group and a property team from UBS, is working on this issue for the forthcoming launch of its balanced property unit trust.

ArbreIM head Richard Tanner said: “Everyone accepts that at certain stages, valuations, which use backward-looking data, lag the market.”

The problem for fund managers in 2007/2008 was that large numbers of investors tried to come out of open-ended funds very fast, particularly in late 2007, as the market began to fall, and before the true extent of the falls were reflected in the unit prices.

Conversely, open-ended funds have had investors trying to come back in to buy units before the rise in the market was reflected in the prices. Some fund managers have chosen to close funds. Crosby said a possible solution was “to tweak the valuation system to get all the funds singing off the same song sheet”.