What’s the Issue?
In a multi-share class fund, each class may vary in currency, fee structure, or income treatment, but all classes share the same underlying portfolio. Their daily NAV movements should largely track together.
When one share class moves significantly more than the others, exceeding its set tolerance threshold, it can reveal a potential breakdown in pricing, booking, or data flow.
What Drives the Divergence?
This divergence may be driven by inconsistent FX rates, uneven fee accruals, or delays in pricing or corporate action processing. Manual overrides, if not applied uniformly, can also distort the picture. In some cases, legacy system limitations or isolated fund-specific exceptions (e.g., hedged share classes with stale forward FX rates) may go unnoticed until the tolerance framework flags a material deviation.
Role of Tolerances
Each fund or ManCo defines its own tolerance thresholds, typically in the range of 2% to 5%. These figures help standardise exception handling, focus investigation efforts, and demonstrate control to external stakeholders. The real value of a tolerance framework lies in its ability to separate routine variation from genuine concern.
The real value of a tolerance framework lies in its ability to distinguish between routine operational noise and genuine pricing concerns. A robust framework supports proportionality that ensures minor, explainable differences don’t trigger excessive noise, while also ensuring material discrepancies are never overlooked.
From an investor due diligence perspective, the presence of clearly defined thresholds, documented breach protocols, and a history of resolution evidence all signal a mature oversight culture.
Ultimately, a well-calibrated tolerance framework acts as both a control mechanism and a communication tool that supports internal teams in their oversight responsibilities and providing external stakeholders with confidence in the integrity of the fund’s daily pricing process.
Why It Matters
Where divergence is left unexplained, the risks quickly multiply:
- Investors may transact at inaccurate NAVs
- Oversight bodies may challenge the robustness of controls
- Internal audit and external stakeholders may lose confidence
What Good Oversight Looks Like
Oversight teams should implement daily NAV comparisons across all share classes, ensuring any breach of tolerance triggers timely review and documented resolution. Patterns of divergence may point to systemic issues that require process improvement.
Leading governance-focused allocators and advisory firms often request evidence of such checks during operational reviews. They want to see not just that thresholds exist, but that exceptions are investigated, escalated appropriately, and feed into control enhancements.
Patterns of divergence may point to systemic issues that require process improvement, such as data lag between systems, inconsistent FX rate sources, or poorly defined override procedures.
Final Thought
Tolerance-led checks are more than just technical controls. They act as early warning signals, helping organisations move from reactive firefighting to proactive governance. When share classes drift apart, what matters most is how quickly, and how confidently, you can explain why.
What's next?
You can also read our recent article on why NAV Oversight Matters. Or if you have a question or would just like to talk NAV with our team, you can contact us here.
