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Interactive Data’s Haddad and Russell Indexes’ Caswell Talk up Fair Value Adjusted Index

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At the end of March, Interactive Data’s Pricing and Reference Data business and Russell Investments teamed up to launch a new service aimed at providing fair value adjusted data on the latter’s global equity indices. The vendors are now exploring the expansion of the service and are consulting with customers about whether it should increase the frequency of its updates from monthly to daily, for example, explains Susie Caswell, senior product manager for Russell Indexes at Russell Investments.

The vendors launched the service with the intention of assisting their mutual clients in comparing the performance of their international funds to benchmark indices. In order to do this, Russell has incorporated data from Interactive Data’s Fair Value Information Service (FVIS) to approximate the fund’s fair value procedures for international equity securities. Robert Haddad, director of Evaluated Services at Interactive Data, explains that the focus is on reducing tracking error in order to allow funds to better conduct performance measurement.

Tracking error estimates the standard deviation of the differences between a mutual fund’s returns versus those of a comparable benchmark index. Thus the higher the tracking error, the higher the perceived risk of a fund. The partners decided to tackle this problem for users of fair value methods by factoring this adjustment into the equation.

“Previously most of our clients have had to deal with the misleading data caused by the perceived tracking error by adding appendices to their communications with clients,” says Haddad. He indicates that the fair value adjustment to the data takes away this problem by providing a more “apples to apples comparison of performance to a benchmark”.

During a recent webinar on the subject, clients and prospective clients of the two vendors indicated that the majority of funds are taking some action to explain the issue of tracking error to their clients. According to a web vote: 2.3% were adding disclosures to their annual reports; 14% directly explained the issue to clients; 7% had created their own fair value benchmark; 4.7% had taken other actions; and 25.6% took more than one of these steps in order to deal with tracking error. Haddad believes that this is proof positive that there is an appetite for the fair value adjusted index service in the market.

The data for the index service is currently available on the third business day of each month on Russell Investments’ website, explains Caswell. “In constructing our indices, the net has been cast widely and the fair value data is currently available on 12 of these indices,” she says. “The modularity of these indices also means that the data can be sliced and diced as required.”

The service is currently provided for the Global, Global Large Cap, Global Small Cap, Global ex-US, Developed Large Cap, Developed ex-North America Large Cap, Developed Europe, Asia Pacific, Asia Pacific ex-Japan, Emerging Markets, Global ex-Frontier, and Global ex-Frontier Large Cap indices. However, both parties are open to extending the service to any other areas that their customers require.

“We would also be open to providing data on a daily basis if requested,” says Haddad. “We really believe this service can enhance performance measurement processes by improving the accuracy of inputs.”

As part of the launch, the partners produced a piece of research examining how fair value adjustment could impact assessments of fund performance. The research involved examining 134 international funds and initially tracked the uptake of fair valuation practices over a period of eight years. It highlighted that the percentage of these funds using these practices from 2001 to 2009 increased from around 8% in 2001 to 96% in 2009. Proof once again that fair value practices have become endemic within the market.

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