Posted by Bob on April 12, 19100 at 07:47:07:
U.S. publicly-traded investment companies are required to report the total market value of each of their funds pursuant to generally accepted principles, including reasonable guidelines for the valuation of unlisted securities. The total market value of a fund can be called intrinsic value, investment value, fair value, net asset value or other similar term. The important point is that the valuation methodology be disclosed so that investors can make better informed decisions.
For unlisted securites, there is no objective market price to serve as a proxy for value, so a subjective measure is unavoidable. This creates the potential for abuse in the valuation of unlisted securities. The amount of abuse is limited by two factors. First, in most funds unlisted shares comprise a small proportion of total asset value. Second, the disclosed method of estimating a value for each unlisted security is based on assumptions, such as a forecast of future cash flows, which should be made explicit and be plausible.
The valuation methods and assumptions chosen to estimated the values of unlisted securities indicate whether the fund managers are aggressive or conservative. This information also enables investors to make better informed decisions.
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