VALUATION POLICY - smbcnikko-lu.com

Valuation Policy

of 13 SMBC Nikko Investment Fund Management Company S.A.

SMBC Nikko Investment Fund Management Company S.A.

VALUATION POLICY

Valuation Policy


PRESENTATION

From Risk Management department

Reviewed by Conducting Officer in charge of Risk Management

Approved by Board of Directors

Revision history

Establishment/

Revision date

Details

26 May 2014 Establishment and first approval

29 February 2016 First amendment

06 November 2017 Second amendment (IBSD approval No. 201711-01)

26 September 2018 Third amendment

Scope This Valuation Policy (the “Policy”) sets out the legal & regulatory requirements, as well as the related

actions, which SMBC Nikko Investment Fund Management Company S.A. (hereinafter referred to as

“SNIF”) complies with in order to meet its obligations, in the area of valuation, as Alternative Investment

Fund Manager Management Company pursuant to the Luxembourg Law of 12 July 2013, as amended on

Alternative Investment Managers (the “AIFM law”) and in line with the Commission Delegated Regulation

(Eu) No 231/2013 of 19 December 2012.

In accordance with the above mentioned regulations, SNIF has to establish, implement and maintain a

valuation policy which is consistent with and promotes sound and effective risk management and which

does not induce excessive risk-taking. The policy must be in line with the business strategy, objectives,

values and long term interests of SNIF.

Valuation Policy


Table of contents

Contents

Preamble ................................................................................................................................................................. 4

1 Governance ..................................................................................................................................................... 4

1.1. Delegated activities ........................................................................................................................................ 4

1.2. Independence of the valuation function......................................................................................................... 4

1.3. Risk Management .......................................................................................................................................... 4

1.4. Pricing Committee .......................................................................................................................................... 5

1.5. Management Committee ............................................................................................................................... 5

1.6. Board of Directors .......................................................................................................................................... 5

1.7. External valuer(s) ........................................................................................................................................... 5

1.8. Policy review ................................................................................................................................................... 6

2 Valuation process ............................................................................................................................................ 6

2.1. Automated Processes ..................................................................................................................................... 6

2.2. Manual Processes ........................................................................................................................................... 7

2.3. Indicative mark-to market NAV for Nikko Money Market Fund .................................................................... 7

3 Reporting activities ....................................................................................................................................... 10

4 Escalation process ......................................................................................................................................... 10

5 Due Diligence ................................................................................................................................................ 11

APPENDIX I ............................................................................................................................................................ 12

Valuation Policy


Preamble

The Risk Management department, supported by SNIF’s Senior Management, is responsible for the implementation and application of the Valuation Policy, subject to the approval of the Board of Directors of SNIF (the “Board of Directors”). The Valuation Policy and any amendments thereto will be made available to the CSSF upon request.

1 Governance

1.1. Delegated activities

SNIF has appointed SMBC Nikko Bank (Luxembourg) S.A. (“SNBL”) as the Central Administrator of all the

funds managed by SNIF (hereafter, the “Fund(s)”) and, as a consequence, SNIF has delegated to SNBL the

relevant tasks of the “day-to-day” valuation process.

The Prospectuses of the Funds shall then indicate that the determination of the net asset value of the

Funds (the “NAV”) is delegated to the central administrator (the “Central Administrator”). The Central

Administrator is therefore responsible for ensuring that the valuation of each Fund`s portfolio is

determined in line with the description provided in the applicable prospectus according to the dedicated

central administration agreement between SNBL and SNIF.

The Risk Management department has implemented dedicated processes and oversight monitoring controls over SNBL. Any valuation issues detected by the Risk management Officer are escalated according to the process described below.

1.2. Independence of the valuation function

SNIF has delegated the portfolio management activities to external portfolio managers for which the Portfolio Management department within SNIF has implemented dedicated oversight controls.

Portfolio Managers are not involved in the valuation process as to ensure the full independence of the latter.

The Portfolio Managers and/or the Portfolio Management department can be involved, if needed, on an ad-hoc basis only in the process of suggesting alternative pricing sources to be used in the valuation to the Pricing Committee.

1.3. Risk Management

The Risk Management department is in charge of the valuation process at SNIF. For this purpose, the Risk Management department analyzes/reviews each Fund’s investments periodically according to the relevant risk management processes implemented.

In addition, the Risk Management has implemented dedicated oversight controls and due diligences regarding the Central Administration activities delegated to SNBL.

SNIF is ultimately in charge of the valuation of the fund’s assets. The Securities Pricing Department of SNBL (the “Securities Pricing Department”) is not considered as independent valuer, with pricing activities

Valuation Policy


performed by this team being limited to price downloads and not including any judgment/analysis. All valuation requiring decisions/analysis are the Management Company’s responsibility.

1.4. Pricing Committee

SNIF has set-up a dedicated Pricing Committee for consultation whenever is needed. The Pricing Committee’s role is to make recommendations to solve issues related to portfolio valuation.

The pricing committee is composed by the following people:

• A Risk Management Officer / Conducting Officer responsible for risk management in case of absence of a Risk Management Officer (chairman of the Pricing Committee);

• Conducting Officer responsible for risk management; • The Vice President or Assistant Vice President of the Securities Pricing Department.

The Pricing Committee recommendations are taken by majority vote of members of the Pricing Committee, and are recorded in the minutes of the meetings. The information considered and the basis for the valuation decision/recommendation should be documented, and the supporting data should be retained. The rationale for the use of a good faith estimate of fair value that is different from a market quotation or pricing service valuation obtained should also be documented. As a general principle, the valuation of an instrument should reflect the amount that a Fund would reasonably expect to receive for the investment upon its current sale. The recommendations are subject to the approval of at least one member of the Management Committee before formally instructing the Securities Pricing Department.

The list of participants may be extended to include any person affected by the agenda or who is likely to be able to provide relevant information on a particular item of the agenda.

1.5. Management Committee

Any decision taken by the Pricing Committee is then monthly reported to the Management Committee of SNIF. The reporting is materialized in the minutes of the Management Committee.

1.6. Board of Directors

Any decision taken by the Pricing Committee is then quarterly reported to the Board of Directors of SNIF and of the funds (when applicable). The reporting is materialized in the minutes of the Board of Directors.

1.7. External valuer(s)

Currently, there are no external valuers. However, for some specific products (e.g. structured notes), SNIF has appointed independent external service providers supporting the Risk Management department in verifying / reviewing the calculation performed by external parties as to ensure the correctness and the full independence of the valuation process for the concerned assets (please also refer to Par. 2 Valuation Process).

Valuation Policy


1.8. Policy review

Valuation policy is subject to periodic review of the policies and procedures, including the valuation methodologies. The review is carried out at least annually and before the AIF engages with a new investment strategy or a new type of asset that is not covered by the actual valuation policy.

SNIF reserves the right to amend this Policy from time to time if circumstances (e.g. changes to legislation and regulations) or its continuous review makes it necessary.

SNIF follows the appropriate procedures to keep this Policy updated and will notify its staff members immediately if any changes are made.

2 Valuation process

The Securities Pricing Department of SNBL has implemented two main valuation processes (i.e.

automated and manual) as described below.

2.1. Automated Processes

The Valuation Process is mainly performed by the Securities Pricing Department, except for the Forex instruments (please refer to Forex valuation part mentioned below) as outsourced by SNIF and ruled by a dedicated agreement.

In particular, the valuation process is based on automatic upload of the information included in the different pricing service providers directly into the accounting system Olympic according to the funds’ NAV frequency.

The sources of the pricing are the following ones:

• Bloomberg; • Thomson Reuters; • ICE Data.

The pricing information is always checked between at least two of the three above listed sources. In case only one source is available, the Securities Pricing Department performs further investigation aiming to ensure the reliability of the pricing gathered (e.g. cross-check with other public information / service providers). When needed, the Risk Management department of SNIF is immediately involved.

Forex Valuation

The Forex valuation is performed by the Fund Accounting department of SNBL according to the

periodicity of the funds’ NAV.

In particular, the valuation process is based on automatic upload of the information included in the different pricing service providers directly into the accounting system Olympic.

The sources of the pricing are the following ones:

• Bloomberg; • Thomson Reuters.

Valuation Policy


The pricing information is always checked between the two above listed sources.

The Fund Accounting department of SNBL has implemented dedicated controls aiming to ensure that all the prices are correctly and completely uploaded in Olympic and performs dedicated investigation activities, when necessary.

In case of major issues in gathering the necessary information for the evaluation process, the Securities Pricing Department immediately informs the Risk Management department in order to agree on the necessary actions to be taken.

2.2. Manual Processes

Funds of Funds investments

With regards to Funds of Funds investments, in some cases the NAV of an invested/underlying fund is not published and thus not available as public source.

For this purpose, the Securities Pricing Department has set up a specific process with the different central administrators of the funds in which SNIF’s funds invest, in order to receive the relevant information on the official NAV calculation day. This information is received through a dedicated Excel file which is automatically uploaded into the Olympic system according to the funds’ NAV frequency.

For some Funds of Funds, the NAV of the underliyng Funds is calculated less frequently than the one of the Funds managed by SNIF. In this case, the value of the latest available official NAV is used for the NAV of SNIF’s funds.

Structured notes

In case of structured notes, the Securities Pricing Department receives, on NAV frequency basis, the pricing from the relevant Calculation Agent1.

For this specific product, the Risk Management department performs a quarterly independent review of the price received from the Calculation Agent by involving an independent external service provider, when necessary, according to the complexity of the calculation.

2.3. Indicative mark-to market NAV for Nikko Money Market Fund

a) Parallel NAV calculation under the new MMF regulation (2017)

As per the new EU regulation on Money Market Funds dated 24 June 2017 and entering into force as of 21 July 2018 (2017/1131 – “new MMFR”), public debt CNAV MMFs - the selected MMF scheme for Nikko Money Market Fund - may be valued by using the amortised cost method (article 29 - Please refer to Appendix I). The regulation is additionally requiring an MMF to calculate a NAV per unit in accordance with mark-to-market method (article 30). Although the NAV calculated in accordance with the amortised cost method remains the official NAV, the difference between the constant NAV per unit and the NAV per unit calculated in accordance with mark-to-market (“MTM”) should be monitored and published daily to track possible price deviations.

1 The Note Calculation Agent has the sole and absolute discretion to carry out calculations, as described in the terms

and conditions of the Notes and to make certain determinations and valuations with regards to the Notes.

Valuation Policy


b) Requirement analysis

Based on the above requirement, SNIF initiated discussions with SNBL as administrator of the fund to prepare the parallel NAV calculation and understand the calculation constraints towards the automation of the NAV calculation and replacement of the existing MTM comparison process using excel sheets.

According to the drafting of the article 30 of the regulation it can be assumed that assets and liabilities should be valued in accordance with mark-to-market method:

“An MMF shall calculate a NAV per unit or share as the difference between the sum of all assets of the MMF and the sum of all liabilities of the MMF valued in accordance with mark-to-market or mark-to-model, or both, divided by the number of outstanding units or shares of the MMF.”

Nevertheless SNIF & SNBL identified different issues with this premise for the parallel NAV calculation using different levels of assets (amortized cost and mark-to-market):

- % based fees – using assets calculated under different methods will create a daily difference (fees accruals) and a quarterly impact as the total of the fees paid (based on amortized cost as per prospectus) will be different from what was accrued under MTM method. Differences due to fees could accumulate over time ;

- Dividend – using different assets will create a daily difference (accrual) and a monthly impact as the distributed dividend (based on amortized cost) will be different from what was accrued under MTM method;

- Possible deviation in the number of shares between both calculations.

With no technical guidance being available at the time of the application for Public Debt CNAV scheme for Nikko Money Market Fund, SNIF has considered three options:

1. Calculate fees and dividend accruals based on MTM NAV

2. Use fees and dividend accruals of CNAV accounting in the MTM NAV

3. Hybrid of 1 and 2: Initially apply fee and dividend accruals based on MTM NAV and once a month/quarter upon payment adjustment is made in MTM NAV

c) Scenario analysis

A workshop has been organised with Deloitte to support our decision process. The agenda mainly covered the following elements:

- Presentation of the regulation (level I) and its main challenges;

- Discussion around ”grey areas” where the market is still waiting RTS to elaborate;

- Q&A session on specific topics : parallel NAV calculation methods (simulations/scenario analysis) ;

- Additional guidance to be provided on specific remaining open points highlighted during the Q&A.

Different NAV calculation simulations have been made for the workshop (and following discussions) to assess the impact of the fees and dividend on the parallel NAV calculation. Different levels of yield evolution (low, average and high) have also been tested on a portfolio having a decreasing WAL from 120 days to 0. Simulations were made with and without calculating NAV based fees.

Valuation Policy


The analysis focused on the possible difference of NAV per share between CNAV and MTM NAV.

A second analysis focused on the difference of NAV per share for a portfolio with a constant WAL (not conclusive).

SNIF finally performed its own analysis, testing possible NAV deviations under the different methods (different WAL, yields, fees).

d) Conclusions

Based on the analysis performed, SNIF has decided to calculate the Mark-to-Market (“MTM”) NAV as the sum of the assets valued in accordance with MTM and the sum of the liabilities from the constant NAV calculation divided by the number of outstanding units of the official NAV. SNIF has decided not to recalculate separate liabilities based on assets valued under the MTM method for the following reasons:

SNIF understands that the intention of the daily monitoring is to track possible overestimation of the constant NAV calculated in accordance with amortized cost method compared to NAV calculated in accordance with MTM (that will reflect the actual market prices of the instruments). We believe that changing the valuation method of the assets while keeping all other parameters unchanged will better reflect difference in assets valuation methodology that could otherwise be altered if other parameters of the MTM NAV are amended/recalculated as well.

The MTM NAV is only indicative, there is no transaction on this NAV and so there is no regulatory need to recalculate fees or dividend on MTM basis as it is not an official NAV;

We have run simulations on top of the ones made and discussed as part of the workshop with Deloitte and came to the conclusion that using actual fees or recalculating fees based on MTM valuation has no significant impact on the monitoring. Recalculating liabilities would however significantly complicate the MTM NAV calculation process and create possible operational risk that we want to avoid.

The Nikko Money Market Fund will be a Public Debt CNAV MMF investing in short term instruments from public debt issuers with low credit risk. The valuation difference between MTM and amortized cost is expected to remain limited as should be the difference in liabilities.

Although this is not foreseen in the regulation if the board had to instruct a switch from amortized cost method to MTM method for the NAV calculation of our Nikko Money Market Fund, all the existing liabilities/accruals calculated until switching date with amortized cost method would still be due. It is only after the change of valuation method that accruals would be calculated based on MTM assets. We believe therefore that using the same liabilities for both methods in the monitoring exercise is relevant and accurate.

Deloitte as auditor of the fund confirmed they had no objection on the process following our workshop discussion and the rational of our decision.

e) Implementation

SNIF has instructed SNBL to proceed with the parallel NAV calculation in accordance with the above principles from 28 September 2018. A dedicated module will be added in the fund administration system (OLYMPIC) by ERI Bancaire in order to automate the parallel NAV calculation. As of today MTM valuations are circulated by SNBL for information via excel sheets. The source for the MTM valuation of the money

Valuation Policy


market instruments is Reuters (no change). For information and monitoring purpose, the NAV per share under amortised cost (CNAV) and MTM method will be displayed daily on the website of the company together with the difference between both NAVs.

3 Reporting activities

In case of any issue detected by the Securities Pricing Department in gathering the pricing information about a specific asset, the Risk Management department is immediately informed in writing about the issue.

In addition, the Securities Pricing Department provides the Risk Management department of the Management Company with specific reports including agreed KPIs/KRIs and mentioning, in particular:

• Stale price securities2; • Unlisted securities; • Number of default securities; • Difference in intraday prices; • Difficult-to-price securities in the portfolios on a regular basis to SNIF.

These reports are analyzed by the Risk Management department of SNIF and reported during the monthly Management Committee of SNIF (the “Management Committee”) to discuss about any action to be taken. The Investment Managers are involved, if needed, in the process of suggesting alternative pricing sources to be used in the valuation.

The Risk Manager and/or the Management Committee can then decide to involve the Pricing Committee, accordingly.

4 Escalation process

According to the process above reported, should the Risk Management department detect any issue related to the valuation process for which dedicated remediation activities needs to be implemented, this is immediately reported to the Pricing Committee’s members.

For this purpose, the Pricing Committee is organised by the Risk Manager department when needed.

The discussions and actions agreed by the Pricing Committee, on the basis of the supporting documentation gathered by the attendees, are duly reported in the relevant minutes, which are circulated for validation among the attendees once each meeting took place. In case of pricing issue the Pricing Committee can recommend the use of an external valuer as the case may be to support the valuation process. The use of an external valuer will have to be approved by the Management Committee and implemented under the guidance of the Risk Management function.

Recommendations are taken by majority vote of members of the Pricing Committee, and are recorded in the minutes of the meetings.

2 A price is considered stale when there is no variation on the price compared to the previous valuation day price for

a certain consecutive period of time to be determined

Valuation Policy


The minutes are also included in the document pack to be ratified at the Management Committee and at

Board of Directors meeting happening in the subsequent month / quarter.

When needed, the Pricing Committee can also agree to immediately escalate the final decision to the Management Committee and/or to the Board of Directors by providing the latter with the relevant supporting documentation.

5 Due Diligence

A detailed due diligence and an ongoing review will be conducted by the Risk Management department ensuring that the Valuation activities delegated to SNBL are in line with internal procedures adopted by the latter and compliant with the agreements signed between SNIF and SNBL.

Valuation Policy


APPENDIX I

REGULATION (EU) 2017/1131 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017 on money market funds Article 29

Valuation of MMFs

1. The assets of an MMF shall be valued on at least a daily basis.

2. The assets of an MMF shall be valued by using mark-to-market whenever possible.

3. When using mark- to-market:

(a) the asset of an MMF shall be valued at the more prudent side of bid and offer unless the asset can be closed out at mid-market;

(b) only good quality market data shall be used; such data shall be assessed on the basis of all of the following factors:

(i) the number and quality of the counterparties; (ii) the volume and turnover in the market of the asset of the MMF; (iii) the issue size and the portion of the issue that the MMF plans to buy or sell.

4. Where use of mark-to-market is not possible or the market data is not of sufficient quality, an asset of an MMF shall be valued conservatively by using mark-to-model. The model shall accurately estimate the intrinsic value of the asset of an MMF, based on all of the following up-to-date key factors:

(a) the volume and turnover in the market of that asset;

(b) the issue size and the portion of the issue that the MMF plans to buy or sell;

(c) market risk, interest rate risk, credit risk attached to the asset. When using mark-to-model, the amortised cost method shall not be used.

5. A valuation carried out in accordance with paragraphs 2, 3, 4, 6 and 7 shall be communicated to the competent authorities.

6. Notwithstanding paragraphs 2, 3 and 4, the assets of public debt CNAV MMFs may additionally be valued by using the amortised cost method.

Article 30

Calculation of NAV per unit or share

1. An MMF shall calculate a NAV per unit or share as the difference between the sum of all assets of the MMF and the sum of all liabilities of the MMF valued in accordance with mark-to-market or mark-to-model, or both, divided by the number of outstanding units or shares of the MMF.

Valuation Policy


2. The NAV per unit or share shall be rounded to the nearest basis point or its equivalent when the NAV is published in a currency unit.

3. The NAV per unit or share of an MMF shall be calculated and published at least daily on the public section of the website of the MMF.

Article 31

Calculation of the constant NAV per unit or share of public debt CNAV MMFs

1. A public debt CNAV MMF shall calculate a constant NAV per unit or share as the difference between the sum of all of its assets valued in accordance with the amortised cost method, as provided for in Article 29(6), and the sum of all of its liabilities, divided by the number of its outstanding units or shares.

2. The constant NAV per unit or share of a public debt CNAV MMF shall be rounded to the nearest percentage point or its equivalent when the constant NAV is published in a currency unit.

3. The constant NAV per unit or share of a public debt CNAV MMF shall be calculated at least daily.

4. The difference between the constant NAV per unit or share and the NAV per unit or share calculated in accordance with Article 30 shall be monitored and published daily on the public section of the website of the MMF.

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