3.1 Calculation of the Net Asset Value

The calculation of the net asset value (NAV) of a CIS is extremely important, as the NAV reflects the price which an investor pays when investing in a CIS (subject to any additional up-front charges) and the price an investor will receive (subject to any additional exit charges) should a holding be liquidated. It is calculated by dividing the total value of the investments in a CIS by the number of units in issue, plus/minus adjustments for accrued fees, expenses and other liabilities.

If the NAV is incorrect, an investor may not be charged the correct amount when joining a CIS, or may not receive the correct amount on liquidation. If the NAV has been incorrectly overstated, an investor may be overcharged when purchasing units. Conversely, if the NAV has been understated, an investor may not receive the correct proceeds of sale on liquidation.

It is important to ensure that supervision of the CIS confirms that the operator has systems in place to ensure that calculations of the NAV are correct at each valuation point. If an error is made in a calculation and is not detected for a period of time, it is possible that all investors who have either bought or sold units during the period will have been disadvantaged. To correct such an error, including determining whether compensation is payable to investors or to a CIS itself, considerable effort may be required on the part of the operator to resolve the situation.

Supervision of NAV calculations should, in the first instance, seek to confirm that all the property of a CIS has been included and that all the property has been valued at the point of calculation. This will include checking that income from investments and cash deposits have been included and that correct deductions for charges and expenses have been made.

3.2 Valuation of Investments

The particular regulatory regime to which a CIS is subject and an individual CIS's prospectus or rules may prescribe how the investments should be valued. The purpose of the supervision is to ensure compliance with these requirements.

Supervision should seek to ensure that all the property of a CIS is valued at each valuation point. If a CIS is required to value investments at market value then the source of the pricing information, usually a third party supplier, should be checked for accuracy and timeliness. This can be carried out by comparing the prices used by a CIS with another source of the same information.

If an operator cannot obtain the price of an investment from a recognized third party supplier, for example if the investment is unquoted, or if trading in the investment has been suspended, supervision should seek to confirm that any alternative method of valuation used by the operator is reasonable. The check should consider whether the source and the basis of the quotations are reasonable and also should take into account the frequency with which quotations are received and reviewed. It would be prudent to confirm also there were no conflicts of interest between the counterparties providing the quotations and either an operator or a CIS itself.

The frequency of the valuation of investments should also be subject to review. Again the frequency may be prescribed by regulations or may be set out in the CIS's prospectus or rules. Typically regulatory requirements will impose a minimum frequency.

3.3 Collection of Income on Behalf of a CIS

Collection of income from investments on behalf of a CIS should be the subject of supervision. Unless all the income which is due to a CIS has been accrued or received, it is unlikely that the net asset value of a CIS will be correct.

Income will typically be due to a CIS when a dividend is paid by a company in a CIS's portfolio. It may be a custodian's responsibility to ensure that all income has been collected. Supervision should seek to confirm that arrangements are in place to ensure income has been received and, if not, to be able to follow up with the companies in question as to why the income is outstanding.