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Article
Publication date: 1 January 2003

David F. Freeman

Investment funds use actual trading market prices to value their portfolio investments where possible and “fair valuations” (estimated values) when actual market prices…

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749

Abstract

Investment funds use actual trading market prices to value their portfolio investments where possible and “fair valuations” (estimated values) when actual market prices are not available. The methods used to “fair value” portfolios recently have come under scrutiny. SEC inquiries and enforcement actions and shareholder lawsuits have revealed significant problems in the ways in which fair valuations of the portfolios of investment companies, as well as private investment funds are conducted. Congress and academic commentators are beginning to question fund valuation methods. Despite the importance of the issue to investors, there is little uniformity of practice among funds, no generally accepted means to conduct fair valuations, and little disclosure by funds of the methods by which fair valuations are conducted, who conducts them, when they are conducted, or how much fair valuation affects portfolio or unit valuations. The SEC has never conducted a public study or rulemaking, or issued a significant report on fair value practices. Instead, it is the stuff of a pair of short, 30‐year‐old SEC accounting bulletins and a few cryptic references in periodic revisions to Form N‐1A. Yet, in a letter the SEC staff sent to the Investment Company Institute (ICI) in April 2001, the SEC staff dramatically expanded the use of fair value pricing for use with securities for which actual trading market prices are available.

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Journal of Investment Compliance, vol. 4 no. 1
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 April 2001

G. Bowles, P. McAllister and H. Tarbert

Analyses the effect of valuation error on the implied precision of investment performance measurement of property assets. A prerequisite for measuring the absolute or…

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3355

Abstract

Analyses the effect of valuation error on the implied precision of investment performance measurement of property assets. A prerequisite for measuring the absolute or relative performance of commercial property investments is that valuations provide a reliable proxy for prices. However, there are conceptual and empirical grounds to suggest that uncertainty is inherent in the valuation process. This is primarily due to the structure of the commercial property market and the techniques and guidelines of the property valuation process. Sampling theory is used to measure portfolio valuation error confidence bands for hypothetical property investment portfolios based on different assumptions concerning assumed levels of valuation error, size of portfolio and number of measurement time periods. It is concluded that, for the majority of investment portfolios, property investment performance measures will include some uncertainty and thus the property fund manager should be sceptical of the implied precision in reported measures of return.

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Journal of Property Investment & Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 1 March 2001

ANTHONY S. EVANGELISTA and MARYBETH SORADY

Valuation of portfolio securities continues to hold the limelight in the arena of mutual fund regulation. For the last four years, mutual fund regulators have repeatedly…

Abstract

Valuation of portfolio securities continues to hold the limelight in the arena of mutual fund regulation. For the last four years, mutual fund regulators have repeatedly emphasized the need to adopt or revise procedures to address valuation issues that address modern market conditions resulting from such forces as globalization and the development of derivatives and other exotic securities.

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Journal of Investment Compliance, vol. 2 no. 2
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 March 1988

R.N. LAY FRICS

Traditional methods of portfolio valuation have been criticised for their inability to adapt sufficiently in an increasingly complex market, providing, according to the…

Abstract

Traditional methods of portfolio valuation have been criticised for their inability to adapt sufficiently in an increasingly complex market, providing, according to the critics, simplistic and inaccurate analysis for the client. This paper, while accepting the need to adopt more rigorous valuation techniques in certain areas, argues that new techniques alone will not produce better answers. When adopting an increasingly data‐rich quantitative approach, the valuation is only as good as the information to which the valuer has access. Where information is historic, lacking or distanced from the market, the resulting valuation may be meaningless. Only by being close to the marketplace can the valuer accurately reflect market fluctuations in the valuation and thus provide accurate and precise advice for the client.

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Journal of Valuation, vol. 6 no. 3
Type: Research Article
ISSN: 0263-7480

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Article
Publication date: 23 October 2007

Michel Baroni, Fabrice Barthélémy and Mahdi Mokrane

The aim of this paper is to use rent and price dynamics in the future cash flows in order to improve real estate portfolio valuation.

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1505

Abstract

Purpose

The aim of this paper is to use rent and price dynamics in the future cash flows in order to improve real estate portfolio valuation.

Design/methodology/approach

Monte Carlo simulation methods are employed for the measurement of complex cash generating assets such as real estate assets return distribution. Important simulation inputs, such as the physical real estate price volatility estimator, are provided by results on real estate indices for Paris, derived in an article by Baroni et al..

Findings

Based on a residential real estate portfolio example, simulated cash flows: provide more robust valuations than traditional DCF valuations; permit the user to estimate the portfolio's price distribution for any time horizon; and permit easy values‐at‐risk (VaR) computations.

Originality/value

The terminal value estimation is a core issue in real estate valuation. To estimate it, the proposed method is not based on an anticipated growth rate of cash flows but on the estimation of the trend and the volatility of real estate prices.

Details

Property Management, vol. 25 no. 5
Type: Research Article
ISSN: 0263-7472

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Article
Publication date: 1 January 2001

CHIP VONEIFF and TONY EVANGELISTA

The daily valuation of portfolio securities can be one of the most onerous aspects of managing a registered investment company or mutual fund. The developing complexity of…

Abstract

The daily valuation of portfolio securities can be one of the most onerous aspects of managing a registered investment company or mutual fund. The developing complexity of securities combined with the increasing influence of foreign markets and nonexchange‐traded holdings have made the accurate pricing of securities difficult at best. Mutual funds typically rely on a myriad of sources to price their portfolio holdings, including domestic pricing services, broker‐dealers, foreign custodians or pricing agents, matrix pricing, fair value committees, or any combination thereof (see Exhibit). While the pricing function is typically delegated, fund management and the board of directors or trustees have the ultimate responsibility to ensure that appropriate pricing procedures and supervisory activities are in place.

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Journal of Investment Compliance, vol. 1 no. 4
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 1 June 2002

Jeffrey D. Fisher

The purpose of this paper is to stimulate thinking as to how we might produce timely and more reliable estimates of changes in the value of portfolios, price indices based…

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1882

Abstract

The purpose of this paper is to stimulate thinking as to how we might produce timely and more reliable estimates of changes in the value of portfolios, price indices based on a portfolio of properties, and other aggregate measures of trends in property values. It is argued that a traditional market value appraisal of each individual property may not be necessary or optimal when the objective is to value portfolios or get a leading indicator of shifts in market value at an aggregate level. Rather, it is more important to use a critical mass of current market data that captures systematic movements in property values. Although a traditional market value appraisal is always more likely to capture the unique unsystematic characteristics of an individual property, automated valuation models using a database of valuation data may provide the best way to get real time interim updates of real estate portfolios and create more timely real estate indices.

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Journal of Property Investment & Finance, vol. 20 no. 3
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 5 July 2013

Charles‐Olivier Amédée‐Manesme, Fabrice Barthélémy, Michel Baroni and Etienne Dupuy

This paper aims to show that the accuracy of real estate portfolio valuations and of real estate risk management can be improved through the simultaneous use of Monte…

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1148

Abstract

Purpose

This paper aims to show that the accuracy of real estate portfolio valuations and of real estate risk management can be improved through the simultaneous use of Monte Carlo simulations and options theory.

Design/methodology/approach

The authors' method considers the options embedded in Continental European lease contracts drawn up with tenants who may move before the end of the contract. The authors combine Monte Carlo simulations for both market prices and rental values with an optional model that takes into account a rational tenant's behaviour. They analyze how the options significantly affect the owner's income.

Findings

The authors' main findings are that simulated cash flows which take account of such options are more reliable that those usually computed by the traditional method of discounted cash flow.

Research limitations/implications

Some limitations are inherent to the authors' model: these include the assumption of the rationality of tenant's decisions and the difficulty of calibrating the model given the lack of data in many markets.

Originality/value

The main contribution of the paper is both by accounting for market risk (Monte Carlo simulations for the prices and market rental values) and for accounting for the idiosyncratic risk (the leasing risk).

Details

Journal of Property Investment & Finance, vol. 31 no. 4
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 1 January 2005

Paul Kraft

To describe the application of fair value methodologies to fund operations and emphasize the importance of appropriate valuation procedures.

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5498

Abstract

Purpose

To describe the application of fair value methodologies to fund operations and emphasize the importance of appropriate valuation procedures.

Design/methodology/approach

Discusses the need for appropriate valuation methodologies, describes a recent survey that shows how fair valuation policies and procedures have evolved over time, recommends procedures for adoption of consistent valuation procedures and industry practices, explains recent fund management trends such as the creation of separate valuation committees and the use of third‐party pricing vendors, and warns that valuation is becoming a more frequent subject of SEC examinations.

Findings

Concludes that investment companies, private investment companies, boards, and managements are re‐evaluating and updating their valuation policies and procedures, partly in response to increased focus on valuations by the SEC in its examinations.

Originality/value

Provides the results of a useful survey on fair value methodologies and important considerations for fund managers and directors as they review and update their valuation methodologies and procedures.

Details

Journal of Investment Compliance, vol. 6 no. 1
Type: Research Article
ISSN: 1528-5812

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Article
Publication date: 2 October 2007

Matthew Scrimshaw

The purpose of this paper is to consider the likely effect on capital values of prime retail property in major UK urban centres from any legislative ban of upward‐only…

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1989

Abstract

Purpose

The purpose of this paper is to consider the likely effect on capital values of prime retail property in major UK urban centres from any legislative ban of upward‐only rent reviews (UORRs) from commercial leases.

Design/methodology/approach

The opinion of Leeds‐based valuers regarding changes to yield and rent following a hypothetical ban of UORRs was surveyed and the implied effect on capital values calculated. Rental valuation data were obtained for a portfolio of prime retail properties located in Leeds and its satellite commercial centres, forming a case study. The data were combined with survey responses to develop a valuation model to further consider, in an applied context, the effect on capital values as a result of prohibiting UORRs. The hypothesis tested is that, immediately following enactment, prohibition of UORRs will cause a reduction in capital values of prime retail property in major UK urban centres.

Findings

The conclusion drawn from the research is that, based on contemporary professional opinion, the hypothesis is likely to be true though the extent of the reduction will vary as a function of specific lease and property characteristics.

Research limitations/implications

The behaviour of valuers and the issue of subjectivity in valuation is a limitation of this positivist research. An alternative phenomenological approach, perhaps with structured interviews at its core, might produce alternative findings.

Originality/value

This research attempts to quantify the effect on capital values on prime retail property following any ban of upwards only rent reviews, a subject that holds a high level of contemporary interest with all property stakeholders.

Details

Journal of Property Investment & Finance, vol. 25 no. 6
Type: Research Article
ISSN: 1463-578X

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