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Thread: What is a "FV" and how does it work?

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    Default What is a "FV" and how does it work?

    What is a “FV” and how does it work?

    This question has been asked several times on this board. WHEELS and several members have tried to explain it. This thread will hopeful shed some light on the FV.

    The FV means “Fair Valuation” or “Fair Value Adjustment” or “Fair Value Pricing”.


    From the TSP.GOV web site:
    Participants have asked why, on some days, the change in the I Fund share price reported by the TSP does not match the change reported for the Morgan Stanley EAFE (Europe, Australasia, Far East) index, which the I Fund tracks. This happens when the Board's investment manager, Barclays Global Investors (BGI) reprices its EAFE Equity Index Fund, in which the TSP invests, after the close of the foreign markets.
    This process, known as "fair valuation" or "fair value pricing" occurs when there are large U.S. market or currency movements between the time the foreign markets close and 4:00 p.m. eastern time, when BGI's share prices are determined.

    Fair value pricing is used by mutual funds when there is a gap between the time the index closes and the time the fund is priced to reflect the index. Fair value pricing was implemented to protect long-term shareholders from short-term traders attempting to profit from price difference between the index's closing price and the price of the fund before it was repriced. While it causes some variation in daily pricing, the variation is generally reversed the next day.
    Fair value pricing in the TSP's I Fund occurs less than 20% of the time. The TSP is meant to be a long-term retirement savings account, not a short term trading vehicle. Mutual funds use fair value, redemption fees, and limits on numbers of trades to prevent market timing activity and the resulting excessive trading costs from hurting the performance of the fund. To date, the TSP has chosen to use only fair value pricing, but that may change in the future.
    Fair valuation ensures that traders cannot "market time" the I Fund by making investment decisions based on the "stale" prices, thus diluting the returns of other participants who invest in the I Fund. Because the EAFE uses the foreign market closing prices to calculate its values, its price change will differ from the TSP's on those days.


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  3. #2

    Default Re: What is a "FV" and how does it work?

    Great post, Gilligan. It even makes me feel guilty about being upset over the FV's.

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  5. #3

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    Default Re: What is a "FV" and how does it work?

    I think they are CROOKS!



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  7. #4

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    Default Re: What is a "FV" and how does it work?

    Quote Originally Posted by nnuut
    I think they are CROOKS!

    I AGREE!!

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    Default Re: What is a "FV" and how does it work?

    Quote Originally Posted by Gilligan

    WHEELS and several members have tried to explain it. This thread will hopefully shed some light on the FV.
    I should have said that Wheels has explained it but it takes a while for it to sink in to our thick skulls. In the “Playing the I fund” thread the FV is discussed several times and Wheels has given some very good explanations. I still don’t fully understand how it works, but as Wheels has said in the past that Barclays doesn’t want us to understand the FV.

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    Default Re: What is a "FV" and how does it work?

    Quote Originally Posted by nnuut
    I think they are CROOKS!
    I used to call the FV the “Unfair Valuation”. To me the FV was like price gouging, price manipulation, or insider trading. I have been burned by the FV in the past. I wanted to write my congressman and ask him to launch a congressional investigation into Barclays practices.



    After studying the FV, I try to see it from Barclays point of view. Lets use a real estate analogy.



    Lets say that you have 100 acres that you put on the market to sell and you list it with a realtor for $100k including the mineral rights. Now a wild cat drilling rig just struck oil next door and the oil exploration company will pay you $5k to $10k a month in royalties. Next thing you know your realtor calls you and says that he has a cash buyer and wants to close in 2 weeks. You tell your realtor that you have decided to up the price to $1 million because of the discovery of oil, but the realtor forces the sale for only $100k.

    (A realtor cannot legally do that in the US, but similar transactions like that happen in some parts of the world.)



    How does that relate to the FV?

    Say, one night the Nikkei and FTSE are down. The US markets gain 3% on some great news. You run to your computer and go 100% I-Fund and you know that you are fixing to make a bundle. Now Barclays is getting tons of orders to buy I-Fund shares but the foreign markets that trade those shares are closed. So Barclays has to predict what they can buy the EAFE shares for when the markets open up. Since the foreign markets generally follow the US markets, Barclays imposes a 3% FV.



    Now that was not the best analogy, but I hope you can see why Barclays has to impose the FV. Barclays has to predict what they can buy or sell EAFE shares for. And, no, I do not work for Barclays.

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  13. #7

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    Default Re: What is a "FV" and how does it work?

    That explanation seems reasonable as far as it goes, but it implies that the price is correctly adjusted each and every day. Where do such concepts as "owing us some" and "paying it back in a few days" come from??
    Trading, in its simplest form, is the process of capturing the disconnect between perception and reality.

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  15. #8

    Default Re: What is a "FV" and how does it work?

    Quote Originally Posted by Pilgrim
    That explanation seems reasonable as far as it goes, but it implies that the price is correctly adjusted each and every day. Where do such concepts as "owing us some" and "paying it back in a few days" come from??
    It is not correctly adjusted each and every day. Many days it is not "adjusted" at all. The concept of "owing us some" or "paying it back" comes from them having to correct these adjustments when they do happen. Let's say that the MSCI EAFE index goes up 1/2%, and we are all expecting the I fund to pay 9 cents. But Barclays applies fair valuation that day and the I fund only goes up 2 cents. They still have to pay us the other 7 cents. So you will see somebody on the board say, "they owe us 7 cents". Now the next day the MSCI EAFE goes up another 1/2%. You will likely see the I fund go up 16 cents. 9 cents for the 1/2% and another 7 cents that they "owed" us.

    Dave
    <><

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  17. #9

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    Default Re: What is a "FV" and how does it work?

    Some how making interest on the delay! Crooks! Why not, that can be a lot of money? Just having a little fun here, BUT!! Skipping a day to pay may pay well.




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    Default Re: What is a "FV" and how does it work?

    Tally of them fudging the daily I-fund prices in 2006
    ======================================
    Jan 03 Overpriced by 1.480%
    Jan 04 Underpriced by 0.707%
    Jan 05 Underpriced by 0.478%

    Jan 06 matched MSCI (0.983% to 1.013%)
    Jan 09 matched MSCI (-0.108% to -0.135%)
    Jan 10 matched MSCI (-0.920% to -0.917%)
    Jan 11 matched MSCI (0.820% to 0.844%)
    Jan 12 matched MSCI
    Jan 13 matched MSCI
    Jan 17 matched MSCI
    Jan 18 matched MSCI
    Jan 19 matched MSCI

    Jan 20 Underpriced by 0.498%
    Jan 23 Overpriced by 0.513%

    Jan 24 matched MSCI (0.165% to 0.145%)
    Jan 25 matched MSCI (0.550% to 0.565%)
    Jan 26 matched MSCI (0.930% to 0.888%)
    Jan 27 matched MSCI (0.813% to 0.815%)
    Jan 30 matched MSCI (-0.269% to -0.226%)
    Jan 31 matched MSCI (0.647% to 0.607%)
    Feb 01 matched MSCI (0.054% to 0.072%)
    Feb 02 matched MSCI (-0.589% to -0.618%)
    Feb 03 matched MSCI (-0.808% to -0.787%)
    Feb 06 matched MSCI (0.054% to 0.078%)

    Feb 07 Underpriced by 0.492% (-0.760% to -0.268%)
    Feb 08 Overpriced by 1.047% (0.055% to -0.992%)
    Feb 09 Underpriced by 0.497% (0.546% to 1.043)

    Feb 10 matched MSCI (-0.652% to -0.623%)
    Feb 13 matched MSCI (-0.3285 to -0.341%)

    Feb 14 Overpriced by 0.698% (0.823% to 0.125%)
    Feb 15 Underpriced by 0.769% (-0.653% to 0.116%)

    Feb 16 Overpriced by 0.524% (0.877% to 0.353%)
    Feb 17 Underpriced by 0.538 (-0.652% to -0.114%)

    Feb 21 matched MSCI (on 20th MSCI = 0.0%, on 21st 0.437% to 0.430%)
    Feb 22 matched MSCI (0.272% to 0.206% - this was actually a penny high but I'll let it slide)
    Feb 23 matched MSCI (0.977% to 0.960%)
    Feb 24 matched MSCI (0.000% to 0.041% - they could have paid a penny but maybe needed to make up for the 22nd extra penny)
    Feb 27 matched MSCI (0.591% to 0.559%)
    Feb 28 matched MSCI (-0.481% to -0.458%) Feb 21 matched MSCI (on 20th MSCI = 0.0%, on 21st 0.437% to 0.430%)
    Feb 22 matched MSCI (0.272% to 0.206%)
    Feb 23 matched MSCI (0.977% to 0.960%)
    Feb 24 matched MSCI (0.000% to 0.041%)
    Feb 27 matched MSCI (0.591% to 0.559%)
    Feb 28 matched MSCI (-0.481% to -0.458%)
    Mar 01 matched MSCI (0.215% to 0.157%)
    Mar 02 matched MSCI (-0.322% to -0.318%)
    Mar 03 matched MSCI (-0.215% to -0.264%)
    Mar 06 matched MSCI (0.323% to 0.358%)
    Mar 07 matched MSCI (-1.289% to -1.330%)
    Mar 08 matched MSCI (-0.490% to -0.545%)
    Mar 09 matched MSCI (1.148 to 1.151%)
    Mar 10 matched MSCI (0.000% to 0.009%)
    Mar 13 matched MSCI (1.297% to 1.247%)

    May17th I-fund down -3.02%- MSCI down 1.929%
    May 18th I-fund down 0.20% - MSCI down 0.885%
    May 19th I-fund up 0.26% - MSCI down 0.897%
    May 22 down 2.40% - MSCI down 1.811%
    May 23rd I-fund up 1.52%- MSCI up 1.491%
    May 24th I-fund down 1.29% - MSCI down 1.269%
    May 25th I-fund up 1.41% - MSCI up 0.632%
    May 26th I-fund up 0.67% - MSCI up 1.416%
    May 30th I-fund down 1.28% - MSCI up 0.255% on Monday & down 0.646% today
    05/31/06 I-Fund up 0.52%, MSCI down 0.425%
    06/01/06 I-Fund up 0.21%, MSCI up 0.171%
    06/02/06 I-Fund up 1.44%, MSCI up 1.434%
    06/05/06 I-Fund down 1.78%, MSCI down 0.566%
    06/06/06 I-Fund down 1.70%, MSCI down 2.922% <-- back to being even
    06/01/06 I-Fund up 0.21%, MSCI up 0.171% <-- Matched
    06/02/06 I-Fund up 1.44%, MSCI up 1.434% <-- Matched

    06/05/06 I-Fund down 1.78%, MSCI down 0.566% - underpriced by 1.2%
    06/06/06 I-Fund down 1.70%, MSCI down 2.922% - overpriced by 1.2% <-- back
    to being even

    06/07/06 I-Fund down 0.420%, MSCI down 0.485% <-- Matched

    06/08/06 I-Fund down 2.586%, MSCI down 3.631% - overpriced by 1.0%
    06/09/06 I-Fund up 0.650%, MSCI up 1.702% - underpriced by 1.0% <-- back to
    being even

    06/12/06 I-Fund down 1.668%, MSCI down 0.844% - underpriced by 0.8%
    06/13/06 I-Fund down 2.956%, MSCI down 2.945% <-- Matched
    06/14/06 I-Fund up 1.410%, MSCI up 0.599% - overpriced by 0.8% <-- back to
    being even

    06/15/06 I-Fund up 3.226%, MSCI up 1.996% - overpriced by 1.2%
    06/16/06 I-Fund down 0.539%, MSCI up 0.614% - underpriced by 1.2% <-- back
    to being even

    06/19/06 I-Fund down 0.325%, MSCI down 0.34% <-- Matched
    06/20/06 I-Fund up 0.217%, MSCI up 0.217% <-- Matched

    06/21/06 I-Fund up 0.922%, MSCI up 0.367% - overpriced by 0.5%
    06/22/06 I-Fund up 0.054%, MSCI up 0.58% - underpriced by 0.5% <-- back to
    being even

    06/23/06 I-Fund down 0.430%, MSCI down 0.39% <-- Matched
    06/26/06 I-Fund up 0.054%, MSCI up 0.006% <-- Matched
    Last edited by eino; 07-23-2006 at 11:58 PM.

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  21. #11
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    Default Re: What is a "FV" and how does it work?

    Quote Originally Posted by Gilligan
    The FV means “Fair Valuation” or “Fair Value Adjustment” or “Fair Value Pricing”.
    There's nothing fair about it !

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  23. #12

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    Default Re: What is a "FV" and how does it work?

    One thing we've always agreed on greggy. Besides your comb-over that is.

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