Although fair-value pricing should help foreign funds keep out market timers and improve performance, the strategy is not perfect. James Atkinson, president of the Guinness Atkinson Funds, doesn't like it. Deciding on what data to enter into the fair-value pricing model is subjective. A fund could intentionally misprice its portfolio to cut volatility or boost quarterly or annual performance. "There is a great deal of subjectivity for something that should be 100% objective," he says. "There is room for abuse."
Atkinson doesn't use fair-value pricing on his Guinness Asia Focus Fund and Guinness Flight China Hong Kong Fund. He values the portfolios at 9:30 a.m. EST. This cuts down the ten-to-13-hour time lag between the close of Asian markets and the New York Stock Exchange.
Madhavan of Barclays says fair-value pricing can introduce tracking error for a fund relative to its benchmark. This can lead to inaccurate pricing because benchmark indexes do not use fair-value pricing. In addition, he says, short-term performance can be distorted if different fund groups adopt different fair-value methodologies.
"If a fund uses fair-value adjustments, but the public benchmark is based on closing prices, there will likely be a greater performance dispersion because the benchmark is using stale foreign prices to calculate its index. One solution is for index providers to also compute fair-value benchmarks."