Trustees should also carefully consider the methodologies that the fund custodian is using to determine and allocate FITBs to ensure that they are consistent with any policies that the fund uses. A further factor that trustees should consider is the potential for “negative gearing” to occur when, for unit pricing, an FITB forms a significant part of the asset base of a specific investment option. In such cases, if the FITB forms a material part of the investment option’s net asset value this will mean that an amount less than the total equity in the investment option will be invested in the underlying assets.

The result of which is that the return achieved by the investment option will be less than that of the underlying assets (because only part of the option’s assets are invested in the underlying assets). The issue of negative gearing positions needs to be carefully considered and disclosed to members because it may affect the return achieved from investing in that option. Again, the issues of allocation arising from an FITB are complex and time-sensitive. They may also impact directly on members and therefore require correct disclosure.

Trustees should seek professional advice, specific to their fund, and will need to exercise judgment to ensure that members will be treated equitably with the allocation of any FITB that the fund may record as an asset. Conclusions The purpose of this article is to increase discussion about some of the issues surrounding FITBs and unit pricing. We take the view that trustees need to be fully informed about these issues in order to be in the best position to make considered and appropriate policy decisions for their fund and members.

Our experience is that most funds have not had to actively consider FITB issues in the past and they therefore have not developed the necessary formal policies covering the determination, valuation and allocation of FITBs. Such policies need to consider this issue from the perspective of required disclosures to members, inclusion and reporting in financial statements as well as ensuring equitable treatment for members.

 

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