Common Questions at Texas CLASS: Reporting Techniques

With another year coming to a close and winter weather setting in, the Texas CLASS team is huddled up at our office, discussing how to further improve our services to the nearly 800 valued Participants from Bay City to Fort Worth, El Paso to Brownsville, and everywhere in between. As we reflect upon all that we learned this year, we thought it would be helpful to share the frequent questions we receive about our methodology for determining the value of assets held within the portfolios for reporting purposes.

Local government investment pools (LGIP) may select different methods of determining the value of assets held within the portfolio for reporting purposes. The two most common methods used to report on the assets of the portfolio are mark-to-market (Fair Value) and amortized cost. While both methods are acceptable, we believe mark-to-market provides a higher level of transparency than amortized cost.

Why does Texas CLASS use the mark-to-market methodology?  

Put simply, we believe that transparency is a critical component of the investment of all public funds, and mark-to-market is essential to that transparency.

The mark-to-market methodology involves obtaining prices for securities in the portfolio on a daily or frequent basis. In the case of Texas CLASS, the portfolios are priced every business day. The prices are based on what a willing buyer would pay a willing seller for the individual positions in the portfolio. When completed routinely while using prices from reliable sources, readers of the financial statements gain an understanding of the liquidity and credit quality of the positions in the portfolio.

Mark-to-market reflects current economic and monetary cycles that may have a direct impact on the underlying values of the portfolio. Changes in the rating or perceived credit quality of the insurer will be immediately reflected in the value of the securities held in the portfolio. When securities are marked-to-market on a daily basis, Participants are able to see the real-time integrity of the safety, liquidity, and yield structure at the core of the Texas CLASS portfolios.

Alternatively, LGIPs employing the amortized cost method adjust the value of the securities in the portfolio daily by a predetermined amount from the purchase date to the maturity date. This method produces very predictable asset valuations regardless of current economic or monetary cycles, and the predetermined value may or may not reflect the actual price achievable in the open market. As a result, many LGIP portfolios that utilize the amortized cost method will still periodically use mark-to-market to reflect the prices more accurately.

Does Texas CLASS calculate the net asset value on an amortized cost basis?

Though Texas CLASS does not calculate net asset value (NAV) on an amortized cost basis, that does not mean Texas CLASS does not maintain a NAV of $1.00. Instead, Texas CLASS calculates NAV in a manner that requires significant daily managerial and operational bandwidth, something every pool manager may not have. Both Texas CLASS and Texas CLASS Government are operated as $1.00 stable NAV funds.

For pricing and redeeming shares, Texas CLASS calculates the NAV of $1.00 per share using the mark-to-market methodology. We believe that the amortized cost method is not the best representation of a portfolio’s true market value as it does not reflect current economic and monetary cycles. While the two different methods will approximate one another during periods of stability in the financial markets, the results are often much different during the inevitable periods of market stress.

In our nearly twenty-four years of service to the Texas local governments, Texas CLASS has continuously maintained a stable NAV of $1.00. We are dedicated to preserving the principal of and generating competitive returns for local governments, and it is our laser-focus on safety, liquidity, and yield that gives Texas CLASS Participants peace-of-mind, knowing we will remain steadfast in those practices.

For more information, please contact the Texas CLASS relationship team.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose.