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 Market Value) and amortized cost. While both methods are acceptable, in our opinion mark-to-market provides a higher level of transparency than amortized cost.
Texas CLASS uses the mark-to-market methodology which involves obtaining prices for securities in the portfolio on a frequent or daily basis. In the case of Texas CLASS, the portfolio is priced every business day. (Note: mark-to-market can be performed multiple times a day if deemed necessary by the fund manager). The prices are based on what a willing buyer would pay to a willing seller for the individual positions in the portfolio. Public Trust Advisors, in its role as Texas CLASS Administrator, believes that this information is exceptionally useful to both the investor and investment manager. When completed routinely and 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 which may have a direct impact on the underlying values of the portfolio. Changes in the rating or perceived credit quality of the insurer will also be immediately reflected in the value of the securities held in the portfolio.
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. The predetermined value may or may not reflect the actual price achievable in the open market. As a result, many LGIP portfolios which utilize the amortized cost method will still use mark-to-market periodically to more accurately reflect the actual prices.
Mark-to-Market and Transparency
While amortized cost and mark-to-market can approximate one another during periods of stability in the financial markets, the results can be much different during times of stress (take for example, the financial crisis of 2008). Most LGIPs maintain sufficient cash to meet investors’ request for funds, however uncertain cash flows can happen and are more likely to develop during times of economic uncertainty. At any given time, the investment advisor may need to sell individual securities in the open market. Mark-to-market methodology allows both the participant in the LGIP and the investment manager to determine the possible gain or loss to be realized from selling the securities in the portfolio. We believe that the mark-to-market methodology gives the users of the financial statements a much better understanding of the structure and
quality of the portfolio.
At Texas CLASS, we believe that transparency is a critical component of the investment of all public funds, and mark-to-market is essential to that transparency.