Stale Bond Price and a Performance-Fee Deadline
Meridian Asia Balanced Fund has SGD 420 million in net assets. Its monthly valuation committee meets at 4 p.m. One holding, a seven-year unlisted corporate bond issued by a regional construction group, is 8.2% of NAV. It last traded 47 days ago at 98.5. Two dealers now show 94.0/97.0 but will not firm a price for a SGD 5 million block. The issuer was downgraded two notches last week and has delayed its annual report. Redemptions received this month equal 6.4% of units. The portfolio manager argues for 97.0 because a mark near 94 would cut the month's return by about 0.29% and push the fund below its performance-fee hurdle. The independent valuation provider has sent a range of 93-96, citing stale comparables. The compliance officer wants 94.0 and a written rationale. The committee has three hours before the NAV must be struck and sent to the trustee.
1. What fair value should the committee adopt for the bond, and what process should it follow before the NAV is struck?
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The committee should adopt 94.0, the bid-side exit price, unless an independent valuation provider gives a more reliable firm executable price.
Reasoning:
- The fund is a price taker for a SGD 5 million block; dealers will not firm at 97.0. Fair value for a redeeming fund is the price it could exit at, not the price that preserves a fee hurdle.
- The 93-96 range reflects stale comparables and a two-notch downgrade. The midpoint is not automatically fair; the bid side is the more prudent exit assumption.
- The portfolio manager has a direct conflict: 97.0 avoids a performance-fee shortfall. That conflict should not drive the mark.
Process before striking NAV:
- Obtain the valuation provider's written range and inputs; document why 94.0 is selected.
- Confirm committee quorum and exclude the portfolio manager from the decision if policy requires.
- Record the conflict, the dealer indications, the downgrade and the stale-trade gap.
- Notify the trustee before or immediately after the NAV is struck, depending on the fund's valuation policy.
- If the committee cannot agree, escalate to the CRO or board delegate rather than defaulting to the manager's mark.
2. How should the fund handle subscriptions and redemptions priced at this NAV, and what should be communicated to investors?
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All subscriptions and redemptions at the same valuation point should receive the same price; the fund should not negotiate a side price with large redeemers.
With 6.4% redemptions, the key risk is dilution. If the bond is marked too high, redeeming investors receive more than their share and remaining investors bear the loss. If the fund's constitution permits swing pricing or a dilution levy, the committee should consider applying it on the same documented basis. If not, it should record why no adjustment was made and monitor the impact.
Communication should be factual and equal:
- Tell investors that the NAV reflects a fair-value estimate for an illiquid bond, not a recent trade.
- Do not disclose the portfolio manager's preferred mark or the committee's debate.
- If the valuation uncertainty is material, disclose the range and the valuation method in the monthly report.
- Do not suspend redemptions merely because the price is uncomfortable; suspend only if fair value cannot be determined reliably. A 93-96 range is determinable.
Any communication must avoid implying that redeeming investors will be made whole later if the mark proves wrong.
3. What governance and record-keeping steps should follow if the portfolio manager continues to object?
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The committee should proceed with the documented fair value and record the dissent rather than allow the objection to delay the NAV indefinitely.
Follow-up actions:
- Minute the portfolio manager's objection, the performance-fee conflict and the committee's reasons for selecting 94.0.
- Place the matter on the conflict register and, if relevant, the valuation committee's exception log.
- Ask internal audit or an independent valuation function to review the process, not just the price.
- Notify the trustee and auditor if the final NAV differs materially from the manager's proposed mark.
- Assess whether any previously struck NAV used an unsupported 97.0-type mark and whether a NAV error correction or investor compensation is required.
- Review whether performance-fee calculation and disclosure need adjustment.
- If the manager continues to pressure the committee, escalate to the CRO and board risk committee as a conduct and governance issue.
The record should show who decided, what evidence was used, what alternatives were rejected and why.