NAV and P&L Reconciliation: A Comprehensive Guide

NAV and P&L reconciliation can be complex and it's important to understand how and when reconciliation occurs, as well as the associated processes.

NAV Calculation (Skip this section if you're already familiar with this)

Definition of NAV

Net Asset Value (NAV) is the value of an investment fund, calculated as assets minus liabilities. To calculate the per-share NAV, simply divide the NAV by the number of outstanding shares. This calculation is most commonly used with mutual funds or unit investment trusts, where the per-share NAV is the price at which the shares of the funds trade.

NAV is struck daily for most funds, using the closing market prices of the portfolio’s securities. It can also be defined at a specific time during market open hours, in which case a snapshot of prices must be taken. Frequency can also vary; hedge funds often have monthly NAV as an example.

A NAV is always calculated at the fund level, but can also be calculated at the fund-strategy level. The sum of the strategies shall then equal the fund level NAV.

Components Involved in NAV Calculation

Total Assets:
Includes: Market value of investments, cash, receivables, accrued income and other assets.
Total Liabilities:
Includes: Typically payables and accrued expenses. Examples include management fees and fees to custody, auditor, etc.

NAV: = Assets – Liabilities

NAV per share: NAV / total number of shares outstanding

Important note: Assets and Liabilities must be per trade date when they enter the NAV calculation, not per settle date!

NAV Reconciliation

The primary purpose of reconciling NAV is to verify that the NAV struck by the fund administrator or internal accounting team is correct.

Getting the NAV 100% correct every day is challenging. You get a duality check on the NAV by producing a shadow NAV (directly or indirectly). The system that produces the shadow NAV can be referred to many different things, e.g.:

Shadow accounting software
Investment Book of Record (IBOR) – common for asset managers. Sometimes also referred to as “Accounting Book of Record (ABOR).”
Portfolio Management System (PMS) – common for hedge funds

We’ll use “IBOR/PMS” in this article.

What is NAV reconciled against

NAV is reconciled to the fund administrator (the custodian doesn’t produce an NAV).

If you’re running in-house accounting, you have an accounting system instead of a fund administrator. In this case, running a separate control of that system could also make sense for the same reason.

To do the reconciliation, you can use:

Excel
Specialised fund reconciliation software
Reconciliation tools within your investment management system (out recommendation, provided the tool is powerful enough)

When is NAV reconciled?

Ideally, NAV should be reconciled as early as possible. If you find a reconciliation break, it’s easier to address before the NAV per share is official (i.e. before outflows, otherwise investors have redeemed at an incorrect NAV).

Early identification of discrepancies ensures that the IBOR/PMS aligns with the fund admin’s view of the NAV. The benefit is that your portfolio managers can make decisions based on portfolio views they know are correct and validated.

Once completed, the three-way reconciliation is done: A) The fund admin reconciles against the custodian and B) the asset manager against the fund admin. The fund reconciliation happens on T or T+1.

Reconciliation diagram - light bg

It’s important to note that complete NAV reconciliation isn’t always needed. Some asset managers don’t reconcile NAV and instead stop after P&L reconciliation. We’ll understand why by looking at the other recs done before the NAV rec.

Steps Preceding the NAV Reconciliation

You can’t jump straight into reconciling NAV. NAV is just one number, so if it differs, you have no idea why or where to go for troubleshooting. Generally, the more complete and automated your investment systems are, the fewer reconciliation breaks you’ll have.

Four steps precede NAV recons and help you find where discrepancies lie:

1. Trade Reconciliation

The first step in the chain of reconciliations is matching executed trades in the order management system (OMS). The OMS is your internal record of all trades; it might be part of an IBOR/PMS or a standalone system.

The trade reconciliation ensures that all trades executed on a given day are accurately recorded and accounted for in your system and by the admin (and custody). Common discrepancies are fees or taxes, especially in emerging markets.

The higher your trading volumes, the more critical this step becomes. You might not need this step if you have low volumes and invest in developed markets.

2. Position Reconciliation

Position reconciliation compares holdings between the admin and your internal system. Usually, this is aggregated on a fund level, even if you have internal strategies. Common data to reconcile per position is:

Instrument (ticker, ISIN, etc)
Currency
Quantity
Price (as quoted in the market)
Market value
Exposure (for derivatives)

3. P&L Reconciliation

The Profit and Loss (P&L) reconciliation process should ideally be done line-by-line. It might be as simple as including a P&L column in the position reconciliation. It could also be that the admin removes funding costs or dividends from the P&L of positions and treats them as separate lines, in which case the position reconciliation becomes more complicated.

Positions aren’t enough; you also need to reconcile P&L from non-trading activities, such as:

Management fees
Custody fees
Auditor fees
Taxes

4. Cash Reconciliation

Finally, cash reconciliation involves verifying the cash account balances (not cash flows). You might want to reconcile settlement date cash with the custodian, but the trade date cash is what you should reconcile against the admin for NAV purposes. If all the previous recs are done and dusted - then cash recs will mostly catch deposits, redemptions and dividends – since you captured all other aspects that affect cash in previous recs.

If you'd like to dive deeper, we have an article specifically about cash and position reconciliation.

5. Final step: NAV recon

The shadow NAV is the sum of the market values in the IBOR/PMS. Since you’ve reconciled all components of the NAV already, the NAV will match. This is why, in some cases, performing this final control isn’t necessary.

Challenges in the NAV Reconciliation Process

Manual break resolution

Problem: Break resolution sometimes requires multiple manual steps, including manual amendment of fees or transactions in the OMS.

Solution: We recommend ensuring reconciliation is part of the investment management system (OMS and IBOR combined). Break resolution becomes easier because you can amend trades and non-trading activities in the investment management system with one click (or even automatic rules).

Flush & fill Order Management System

Problem: If your OMS operates on a flush & fill model, it means it’s dependent on a start-of-day position and cash view from accounting. With a flush-and-fill system, reconciling to accounting is pointless - there is no duality since one view is created from the first.

Solution: Adopt a 2nd or 3rd generation Investment Book of Record. Only one 3rd generation IBOR also has OMS functionality, which is Limina. Reach out to our team to see how it works.

Data collection & aggregation

Problem: Import data from the fund administrator that you want to reconcile. This step should not require any manual intervention! No spreadsheets, no “run a task”, no editing numbers – it should be fully automated.

Solution: Ensure your IBOR/PMS either:

A. Has pre-built connectivity (and maintains it over time) to your fund admin.

B. Has an import-export engine (this is the approach we recommend because it’s faster to set up and change – and is significantly cheaper).

False reconciliation breaks

Problem: If you have too general tolerances, the system will show you a lot of false breaches. This is firstly a waste of time. Secondly, it counterintuitively makes mistakes more likely since you have more information to review manually.

Solution: Ensure that the settings are as granular as possible. Set tolerances differently on different currencies, data types, etc.

Data entry mistakes & spreadsheets

Problem: Manual data entry and manipulation in Excel are susceptible to human errors such as typos and incorrect formulas.

Solution: Ensure that systems are used for reconciliation as much as possible and that data entry is done once (or never).

Exception-based workflows

When you have all of the above, you’ve achieved what we call “exception-based workflows”. This is a type of automation where software is responsible for the complete cycle if there are no errors—gathering data, aggregating/filtering that data and running the investment reconciliation. If everything if ok, no human is needed.

Only when there is a break will the software call for a human to help with the resolution. This is an exception-based workflow and the entire premise of Limina’s investment management system.

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Andreas Holtz

Experienced client relations professional with a proven track record of building and nurturing successful client relationships, bringing a strategic and customer-centric approach to every interaction.