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.:
We’ll use “IBOR/PMS” in this article.
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:
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.
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.
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:
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.
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:
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:
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.
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.
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.