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Thread: Investment Valuation Lags a Quarter

  1. #1
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    Investment Valuation Lags a Quarter

    Several years ago, management made the decision to lag our private equity adjustments for income and unrealized g/l by a quarter because not all partnerships could provide their valuations within the 90-day hold-open period.

    We continue to handle our private equity in this manner but this discussion has come up again as it relates to some of our other investments, particularly since we've revised our investment structure and will be reporting different investment categories going forward.

    Previously, we had a real estate classification that included two real estate debt strategies, All of these investments were reported using current information with the exception of one of the debt strategies that we had to lag because they are unable to get information to us timely. We noted this exception in our CAFR disclosures and have a written policy that these investments will be reported using the most current information available.

    With our new investment structure, we now have a group of investments called private credit. This group includes the two real estate debt strategies, as well as two new investments that are also reported on a lagged basis. This has reopened the discussion of accuracy and timeliness vs. consistency in reporting.
    We would like to know how other systems are handling similar issues. If you've had similar discussions and are willing to share, we would love to hear from you.

    Thank you!

    Glenna Musselman, CPA
    Accountant III
    Iowa Public Employees’ Retirement System
    7401 Register Drive | P.O. Box 9117 | Des Moines, IA 50306-9117
    515-281-0058 voice

  2. #2
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    Throughout the fiscal year (other than fiscal year-end), we simply book the changes to our alternative investments as the quarterly statements come in. We have an 11th business day cutoff with our custodian (Northern Trust) each month so whatever isn’t received in that time-frame goes into the next month’s reporting. But, at fiscal year-end (June), we hold our accounting open longer with the custodian so that we can get better June 30 valuations in our reporting. Generally we hold things open 45 days or until approximately 8/15 (we have a pretty tight time-frame within the state’s CAFR preparation deadlines so our 6/30 financials are done by the end of August for our audit). We then ask all the alternative managers that are usually on a lag to get their valuations in by then and if they cannot get final valuations done by the deadline we ask them to provide estimated/preliminary valuations so that we at least have a closer to actual valuation than if we just used 3/31 valuations. We have done this for a number of years now and although we usually have two managers that we have to beg, plead and threaten on the last day of the deadline, we have found that we generally get pretty good responses. For audit purposes, we track the estimates against the finals when they do finally come in (usually 90 days for the last of them) and we are well within materiality tolerance levels on the differences. I hope this is helpful.

    Connie Flanagan
    North Dakota Retirement and Investment Office

  3. #3
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    STRS Ohio has both private equity and real estate investment funds that report a quarter in arrears. Our process, for monthly reporting, is to take the most recent quarter financials received and adjust for contributions/distributions occurring since the last statement. The private equity side is handled by our Alternative Investment’s back office provider, Grosvenor Capital Management (GCM), who sends us a monthly valuation file that is loaded into our internal accounting system. Although the real estate investment funds are not handled by GCM, the same process is followed for consistency. At fiscal year-end, we do a true-up in mid-September and after many of the managers have finalized their 6/30 statements to capture the difference in value if it is material. This true up is only reflected in the CAFR. I hope this helps.




    Thank you,

    Kathy Boettcher, CPA / Investment Accounting
    BoettchK@strsoh.org / 614.227.7803

  4. #4
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    Glenna,

    OPERS only lags two asset classes with regard to valuation.
    - All OPERS Private Equity and Real Estate is lagged three months, but is adjusted for cash flows.

    OPERS does have a few asset classes that are only valued on a monthly basis, but these are not lagged.
    - Hedge Funds
    - Risk Parity Funds
    - GTAA Funds

    All other OPERS public market assets are valued on a daily basis without lag.

    Please let us know if you have any further questions and we would be more than happy to have a phone conference to discuss.

    Regards,

    Denise


    Denise Blain, CTP
    Assistant Director, Investment Accounting
    Ohio Public Employees Retirement System
    277 E. Town Street
    Columbus, OH 43215
    Phone: 614-225-1442
    Email: dblain@opers.org

  5. #5
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    Glenna, we adjust lagged returns for cash flows and then accrue for unrealized gain/loss based on regression against returns available as of our financial reporting date. We have been using this method for several years and back testing has helped us refine our regression methodology over time. For PE we use our own global equity returns. For RE, we use values at the reporting date from an index with a similar composition to our portfolio. I have included David Munoz of my staff on the email – he can provide you with additional details. I would also be glad to chat with you.


    Robin Madsen, Chief Financial Officer
    Financial Services
    California State Teachers' Retirement System
    Rmadsen@CalSTRS.com | www.CalSTRS.com
    916-414-4385

  6. #6
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    Hi Glenna,

    DPERS also has a lag policy as well for valuation of alternate investments because of the exact same issue that you describe and we’ve handled reporting and valuation using the latest available month end/quarter end reporting.

    Thanks

    Khairat Makanjuola, CPA/CGMA, MBA
    Cash/Debt Manager
    302-744-4401 – T
    khairat.makanjuola@state.de.us

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