Loan-to-value, or LTV for short, remains a myth in our industry. The methodology is challenging to understand on numerous occasions.
Understandably, LTV was defined according to an asset class in the past, as computer power was insufficient for more. The systems are now more sophisticated, and factors such as the trading market, the volume or the redemption gate of funds, and the usual time frame for the money to be credited to the account are considered.
As a result, blue chip stocks with higher downside risk often get a higher Loan-to-value than conservative mutual funds, which have been stable during the COVID-19 impact market turmoil. Furthermore, as a client, one observes that bank-owned products receive a higher value than external product providers.
Loan-to-Value calculation
The justification is that monitoring positions within in-house investment funds hardly influences Loan-to-value calculations. The risk in assigning LTV lies in the potential maximum drawdown, redemption gate and notice period for investment funds. It’s important to note that bank mutual funds have used the redemption gate option.
Today, computing power should efficiently evaluate and weigh standard parameters, including historical market data. This capability can help conservative investment products from non-bank fund managers achieve a Loan-to-value that aligns with modern risk management parameters.
Source: LinkedIn
Source: https://vapa.ch/unlocking-the-mystery-of-loan-to-value/ · vapa.ch
