By Pablo Mayo Cerqueiro
Fund administrators say their clients should help ensure net asset value (NAV) accuracy, following regulators’ demands.
“They could end up losing investments into their fund because of an undetected operational issue at an administrator,” Jonathan Mack, managing director in charge of client service for the Americas at Brown Brothers Harriman Investor Services, told Global Investor.
On Tuesday, BBH launched a web‐based service for asset managers to help them verify the accuracy of their funds’ NAV – the value per share at a specific time – as calculated by their third‐party administrators.
The product, branded InfoNAV and marketed as an “administrator oversight” tool, allows buy‐side firms to calculate a secondary asset value and compare it with their administrators’.
“It started out as an idea in our accounting and client service groups. We know our clients are required by their regulators to do oversight of us,” Mack said of the product, adding that many of BBH’s clients have multiple providers.
“They can outsource certain services, but they can’t outsource their risk.”
Although asset managers turn to third‐party providers for administration services, they are ultimately responsible for the well‐being of their funds, administrators say.
Under Europe’s AIFMD, for example, the fund is responsible for the proper valuation of its assets, the calculation of the net asset value and the publication of that net asset value.
The rules dictate that in no case shall the manager’s liability towards the fund and its investors be affected by the fact that it has appointed an external valuation agent.
And while failing to calculate a fund’s NAV accurately may have negative consequences for the administrator, buy‐side firms face a potentially greater “reputational risk” as well at the possibility that investors receive too much or too little from redemptions, Mack argued.
BBH, which offers investment management, private banking, and securities services, says accuracy rates for NAV calculation among fund administrators have improved significantly in the past decades as clients’ tolerance for error shrank and technology improved.
“Our clients and all asset managers expect a very high level of service across the board, and you have to meet that level. An error today is a much bigger issue than it was 15 years ago,” he said.
Srikumar TE, “Sri”, deputy CEO at Bermuda‐based Apex Fund Services, agrees that it is a good idea for asset managers to keep an eye on their third‐party administration providers and double check their NAV calculations.
“It is in the best interest of the asset manager to ensure that the net asset value calculated and distributed to their investors is accurate,” he said in an interview.
“At the end of the day, they are responsible for the performance of the fund.”
Sri, however, argues that rather than errors there may be disparities between asset managers’ price points for complex portfolio assets and marks provided by their fund administrator.
For example, differences may stem from the complexity of assumptions in valuing a structured asset on a hedge fund manager’s portfolio, whereas the value of vanilla assets is less ambiguous, he said.
Of BBH’s oversight tool, Sri said it is “a nice service” for asset managers but that it also implies a cost‐benefit discussion.
With fund administrator oversight services comes a debate around whether the asset manager or the fund should bear the costs, he argued.
“Effectively, any outsourcing work to oversee or shadow the administrator is a cost that the manager has to bear out of their pocket and not necessarily charge it back to the fund,” Sri said.
Apex, which is now among the top‐eight administrators worldwide following the acquisition of Deutsche Bank’s alternative fund services business, says it recognises the need of shadow NAV services and provides them to its clients.
Earlier this month, the company told Global Investor it was growing its operations in Ireland and the US as part of an expansion push.
For his part, Mack, of Brown Brothers Harriman, concludes that oversight tools become necessary as issues may arise due to the large volume of NAV calculations that administrators conduct yearly.
“Administrators calculate millions of NAVs a year, and at that level there will be occasional calculation issues,” he said.
“Having an independent way to check those calculations ‐ to make sure the NAV going out the door is accurate before it gets to your end client – is a necessity.”
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