THE WESTSCHEME VALUATION MANUAL
The Westscheme Valuation Manual records the valuation policies and practices of Westscheme. The Chief Executive is responsible for oversight of the valuation process generally and for the appointment of all valuers commissioned by Westscheme Pty Ltd, the Trustee for Westscheme. The Chief Executive reports to the Board at least annually on the conduct of the valuation program.
The Trustee invests the monies of Westscheme for the purpose of contributing to the retirement incomes of its members and their beneficiaries. The Trustee is obligated, by law and to support its own governance of the portfolio, to value the investments regularly in order that the Trustee may with confidence:
The Westscheme Valuation Manual covers the following topics:
The Westscheme Valuation Manual is reviewed annually and was last updated and adopted by the Trustee on 9 April 2008.
Portfolio Context and Valuation Implications
Westscheme is a regulated superannuation fund whose sole purpose is to invest the monies contributed by its members in order to provide for their retirement income needs. To this end the Trustee follows a Two Portfolio Investment Strategy under which it invests in not only traditional listed assets but unlisted assets including direct property, infrastructure equity and debt, timberland assets, private equity and debt, and collateralised debt obligations. This strategy is recorded under Westscheme’s Investment Policy Statement and its Target Return Portfolio Policy.
Under Westscheme’s current investment arrangements, the Trustee, under advice, appoints professional investment managers, or invests through their trusts, in respect of traditional listed and traded securities. The Trustee is assisted by Access Capital Advisers in the selection, acquisition and disposal of its non-traditional investments, which it may invest in through pools or directly.
For valuation purposes, Westscheme’s investments and financial exposures can be categorised as:
1. listed and traded securities, and foreign exchange contracts, with realisation prices readily determinable through recognised and regulated exchanges, or through recognised brokerage markets, or payable at face value;
2. unlisted securities or partnership interests with quoted redemption prices, based on the market values of underlying traded assets;
3. externally managed investments in unlisted securities (including pooled trusts and partnerships, Collateralised Debt Obligations (CDOs) and directly held private equity co-investments managed under investment management agreements) with no quoted trading or redemption value; and
4. direct investment in unlisted securities and partnership interests with no quoted trading or redemption value which are not externally managed.
Category 1 investments typically include listed equities, government bonds, traded corporate bonds, short-term money market securities, deposits and foreign exchange contracts. In general, Category 1 investments are valued at the quoted bid price, which by definition represents realisable value. However, it may be necessary to make a further allowance in the valuation for transaction costs related to sale.
Category 2 investments typically include unlisted unit trusts and hedge funds that mainly hold Category 1 assets. For these assets, the managers quote a redemption value. The valuation requirement is to ensure that this is a value at which transactions actually occurred.
Category 3 investments typically include pooled investments in property, infrastructure, debt securities, timber and private equity. Category 3 investments also include CDO investments and externally managed private equity co-investments. The valuation of these pools or directly held securities is undertaken by the investment manager or responsible entity and advised as a unit or security price. The valuation standards followed in these valuations typically follow industry guidelines or standards set by the constituent documents of the pool or the management agreement. The valuation supervision requirement is to ensure that the basis of valuation is satisfactory to Westscheme and that the valuations themselves have been carried out according to the stated standard.
Category 4 investments include direct investments in property, infrastructure, debt securities, or other securities or assets. The valuation of investments in this category will generally require assessment of their specific cash flows and investment terms, with the valuation often based on comparable transaction parameters and risk adjusted discount rates. For these investments, Westscheme is typically responsible for approving the valuation methodology.
As Access Capital Advisers advises on, and often acts as agent in, the acquisition and purchase of the non-traditional investments, it is important (particularly for its Category 4 investments) that Westscheme receives investment valuations, or confirmations of the valuations, independent of Access Capital Advisers.
Under the current practice, Category 4 investments are generally held at cost for the first twelve months of ownership, by which time it is expected that an independent valuer will be appointed. Independent valuers are engaged by Westscheme or the investee company on an asset by asset basis or under umbrella valuation agreements covering multiple assets. The level of influence Westscheme is able to exert over the timing and selection of a valuer for an investment varies with individual investments and is typically governed by the ownership structure of the asset. Where Westscheme is able to exercise control over the appointment and timing of the valuation process, assets valuations should be staggered throughout the year, with each asset revalued at least once each financial year. In addition, the independent valuer should be contracted to provide a quarterly update of the valuation. This is largely progressed through the negotiation of umbrella valuation agreements with independent valuers. The key advantage of this valuation framework is to secure smoother returns throughout the year due to variation in timing of the annual valuations in the asset pool. The quarterly updates conducted by the independent valuer in the form of a roll-forward of the annual valuation model should incorporate any updates to the valuation parameters to account for material information available since the previous valuation.
Westscheme’s auditor, KPMG, is able to review the valuations processes and sample test the specific values as part of the annual audit exercise. KPMG does not conduct independent valuations of Category 4 investments in entities that are wholly owned or controlled by Westscheme.
Statement of Westscheme's Valuation Responsibilities, Policies and Practices
Westscheme’s Investment Policy Statement states that:
“All assets will be regularly valued consistent with Australian Accounting Standard 25 [AAS25] and Australian Venture Capital Association Limited rules and other standards and guidelines, as applicable.”
The Westscheme Valuation Manual expands this statement to establish the following policies in respect to the valuation of Westscheme’s assets.
1. The Chief Executive will be responsible for oversight of the valuation process generally and for the appointment of all valuers commissioned by Westscheme.
2. The Chief Executive will report to the Board at least annually on the conduct of the valuation program and also confirm at the time of recommending the accounts for signing that the valuation of Westscheme’s investments conforms to the policies established in the Manual. The Chief Executive shall maintain the Valuation Schedule and keep the Board informed of changes to the Schedule.
3. Westscheme’s investments and other assets will be valued according to the standards of AAS25 and the principles and practices as otherwise set out in the Manual.
4. All valuations of Category 4 investments will be undertaken by persons with recognised expertise in such matters, working to written instructions, and providing their valuations in writing. Where feasible, Westscheme should aim to rotate its valuers so that the same party is not used to value a particular asset over a period greater than three years in most circumstances. Where avoidable and practicable, Westscheme’s auditor should not be used for valuations. In some circumstances, such as where a valuation and its costs are shared among several investors, a series of independent valuations prepared by one company over a period greater three years, may be unavoidable.
5. In instances (generally related to Category 4 investments) where:
a. a material cost would be incurred either in expense or time in order to commission an annual independent valuation of a given investment to strictly meet the AAS25 standard for that investment; and
b. the Chief Executive considers that the valuation parameters of the investment have remained sufficiently stable that an approximation valuation would be materially correct,
then the Chief Executive may determine to use such an approximation valuation. The Chief Executive will disclose any application of this discretion in the valuation schedules to the Board.
6. The valuation program for Category 4 investments will be spread over the course of each year so as to reduce the likelihood of material spikes in Westscheme’s monthly net investment performance rates that could otherwise result from a bunching of annual valuations. Where Westscheme is able to exercise control over the appointment and timing of the valuation process, the independent valuer should be contracted to provide a quarterly update of the valuation. The quarterly updates conducted by the independent valuer in the form of a roll-forward of the annual valuation model should incorporate any updates to the valuation parameters to account for material information available since the previous valuation.
7. In accordance with AAS25, the selling costs for each investment should be estimated and explicitly included in each valuation, where relevant. It is the practice of Westscheme to seek professional advice in setting these realisation estimates.
8. In determining the carrying value of its Category 2, 3 and 4 investments, Westscheme initially capitalises acquisition costs. This may involve Westscheme either expensing, capitalising or amortising acquisition costs for tax purposes. For fixed interest investments, which are generally valued on a purchase yield basis, the acquisition costs are initially capitalised and then amortised over five years. For most other investments these costs are absorbed into the valuation when the investment is next revalued.
9. Monthly valuations of Westscheme’s CDO investments (category 3) are based on investment bank valuations received plus, in the case of CDO rated note investments, any accrued interest. Interest distributions are typically due quarterly. Accrued interest is calculated with reference to the relevant coupon rate reported via Bloomberg. Interest should not be accrued on a rated note investment if its credit rating has been downgraded by any of Moody’s Investors Service, Standard & Poor’s or Fitch Ratings (information available via Bloomberg), or if under the terms of the CDO’s payment waterfall there were insufficient funds to pay the most recent interest distribution that was due (according to the relevant CDO trustee report).
Asset Class and Cluster Realisation Costs
Realisation costs comprise three components:
When determining the realisation costs that should be applied to its investments, Westscheme considers that it is necessary to make a distinction between listed and unlisted assets, and between direct investments and investments in pooled trusts. It has estimated a baseline percentage that could be applied to investments based on investment class or investment cluster. For specific investments where realisation costs are expected to differ materially from the baseline percentages, adjustments are made.
The Valuation Schedule
The Valuation Schedule attached to the Westscheme Valuation Manual lists all investments, and records for each investment:
The Valuation Schedule follows the list of investments and their unaudited values published on the Westscheme website at: http://www.westscheme.com.au/sundries/search?formSubmitted=true&searchString=Investments+by+Asset+Class six to eight weeks after the end of each natural quarter.
Audited investment values are set out in Westscheme’s Financial Statements for each 30 June which are usually published on the Westscheme website at: http://www.westscheme.com.au/sundries/search?formSubmitted=true&searchString=Financial+Statements in early November on the completion of the annual audit.
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