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Pricing in volatile times – what’s the value?

March 2020

In the current volatile environment, special counsel Matt Moses cautions managers to tread carefully in relation to unit pricing.

Many in the funds management industry will remember when the GFC truly hit in 2008, particularly after the Australian Government announced its deposit guarantee measures. Although large direct property funds and debt funds which offer continuous withdrawals are less common these days, there remain a number of funds which offer regular redemptions (or liquidity).

Here, Matt Moses explores some of the key considerations, steps and duties for fund trustees in these challenging times, including in relation to relying on independent valuations.

UNIT PRICING AND ASSET VALUE

Pricing units can involve a range of considerations and steps, as well as the exercise of discretions by the manager. However, the key consideration is always asset value – what is the current value of the fund's assets? For a fund which invests in say, listed equities, at a time of market turmoil, as long as those equities are able to be traded on the share market, their value can generally be determined on a regular basis. While in times of market disruption or volatility their value may be showing signs of increased volatility, it is still easy to objectively determine at a particular point in time provided the market is liquid.

But what about other types of assets which are not exchange traded, such as commercial property, or so-called 'alternative' asset classes which are subject to specialist valuation methodologies? A common catch phrase is 'everything has a value', but the value of many assets is subjective, so that value can be wrong. Right?

TRUSTEE'S DUTIES AND RELYING ON A THIRD PARTY EXPERT

Fund trustees are subject to a number of duties which arise from various sources, including under the general law, the trust document itself (eg a fund's constitution) and under legislation, such as in the case of a responsible entity, the Corporations Act.

They include a duty to—

  • exercise due diligence and vigilance
  • administer the trust personally and not delegate the trustee's duties or powers
  • preserve trust property and properly invest the trust funds
  • act in good faith in the interests of the beneficiaries (investors).

However, a trustee is entitled to engage experts and other service providers to assist in its functions; and a trust deed will almost always give specific powers to do this. A trustee can therefore engage a valuer and use their expertise to determine the current value of a property or other asset.

In an uncertain environment like we are all experiencing now, a valuation expert might provide an opinion as to value today, but then events overtake that valuation possibly leading to the asset being realised down the track for a lot less. That doesn't necessarily mean the valuer was wrong.

A more specialist asset, though, might be harder to value even in a 'normal' market, let alone in a time of turbulence and uncertainty, when the necessary data might be scarce and transaction evidence non-existent. A manager with specialist assets who needs to price units will still have to apply a value and will still need to rely on the expertise of an independent expert in determining that value.

The question is whether a trustee can rely on an independent valuation in these sorts of times. Logic would say the answer to this question must be 'Yes'. However, the reality is that sometimes the answer may well be 'No'.

The key here is whether, in the circumstances, it was actually reasonable for the trustee to rely on the valuation opinion provided. That can place extra onus on the trustee to carefully consider a valuation report, including looking at the facts and assumptions the valuer relied on, particularly the qualifications and disclaimers which may have been included. This is despite the trustee being unlikely to have valuation expertise, or at least the same level of expertise, as the expert being relied upon.

Units in a fund can still be priced during market or economic turbulence. However, care needs to be taken not only in how assets are valued, but how other moveable variables, such as liabilities, are determined. A trustee should also adhere to the pricing and valuation procedures it has in place, and properly record its decisions and the reasons for them especially if due to circumstances there is a need to depart from those procedures. In the current environment it may be difficult to accurately determine unit prices, and it is entirely possible they will be changing more frequently than in a 'typical' environment.

WHAT STEPS SHOULD A TRUSTEE TAKE?

It might be difficult to predict where the market and other external factors may go, but the best chance a trustee has of protecting themselves (and of acting in the best interests of investors) is to be cautious, follow processes, and carefully document what it is doing and why.

Our Funds Management lawyers understand the complexities of unit pricing and have comprehensive experience to help guide you. Please contact one of our team members if you have any queries or would like more information about the steps you should take.

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