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Fund Spy

Fair Value Pricing Isn't Always Fair, but It's Needed

Events in Japan and Egypt have again brought this topic to the fore.

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The tragedy and turbulence in Japan and the Middle East have led to gyrations in global stock markets over the past few weeks. These financial concerns take a back seat to more important considerations of survival and rescue. But here in the United States, ordinary investors do have some legitimate questions that have arisen during this unsettling period. It's worth the time to look at one of them: the use of fair value pricing.

Fair value pricing occurs when U.S.-based mutual funds assess their net asset values, a task they must do at the end of every trading day. When events occur during the U.S trading day that could have an impact on foreign prices, at a time when the foreign markets are not open to reflect that, funds can use fair value pricing to provide what they consider a more reasonable NAV. Sometimes a different scenario inspires the use of fair value pricing: A stock, or an entire market, isn't trading at all.

What Is Fair Value Pricing, and Why Use It?
Fair value pricing is the effort to assign a more accurate price to a security when a fund firm determines that the typical way of assigning value--simply taking the closing price on the exchange--is no longer adequate. In the mutual fund world, it first came to wide attention in the late 1990s and early 2000s, when the bubble and then the crash created opportunities for what's often called market-timing but is more accurately known as time-zone arbitrage.

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Gregg Wolper, Ph.D. does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.