Unit prices of some funds questioned

There is a growing concern in the funds management industry that the unit prices of many funds may not actually represent the value of a fund's underlying investments.

The issue has raised its head once again because many funds have been making losses for a number of years and are therefore accumulating tax losses and these tax losses are being included in the fund's unit price.

There is no agreed standard on how to deal with this issue, and there is a wide divergence of practices within the industry.

However, Good Returns understands that in some cases tax losses account for between 20 and 30% of a fund's unit price. What more auditors have been expressing concerns about how the value of some funds are being calculated.

The major issue from their perspective is that tax loss can only be included in the valuation if there is a "virtual certainty" that the loss can be realised.

There have been instances in the past where managers haven't been able to realise their tax losses, plus there are concerns about how realisable they are in the current market conditions.

KPMG Legal partner David Ireland says the issue is a significant one for the funds management industry and there is the potential that some investors, probably institutional ones, may have a crack at managers.

The other concern from an investor's point of view is that the value of their investment may translate to be less than what the current unit price says.

In the past when this situation has occurred managers have been known to make significant write downs to unit prices over night and one manager recently cut its unit price 20% due to tax issues.

Ireland says the other issue is that some managers are running two sets of accounts. One is the financial report, and because auditors aren't allowing managers to use tax losses, the value of a fund's investment is lower than what it's unit price says. The other report is the asset valuation one which includes the tax losses as an asset of the fund.

"From a legal perspective it strikes me as pretty odd," he says.