Glossary

Marking to market

This is the process of updating a portfolio to reflect the latest available prices.

Updated September 2019

"Marking to market" simply means updating the value of an asset or a portfolio of assets to reflect the latest available prices. This is easy to do when prices are readily available and assets are highly liquid (easy to buy and sell) and fungible (one is substitutable for another). For example, the value of a portfolio of FTSE 100 shares will be reliably up to date at virtually any point you look at it.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

It's harder when transactions are less frequent, and the asset involved is idiosyncractic for example, you probably have a rough idea of what your house is worth, but you won't know for sure until you actually come to sell it, and there may be several years between official valuations from estate agents or surveyors. The same goes for a private business, for example.

One problem in the 2008 crisis came when the market for subprime mortgage securities collapsed and banks had to mark their holdings to market. As a result, banks' liabilities outweighed their assets, blowing a massive hole in their balance sheets and rendering them effectively bankrupt.

Advertisement
Advertisement - Article continues below

As Robin Wigglesworth points out in the Financial Times this week, in today's financial markets, one key attraction of private equity and other unlisted assets in general for institutional investors, is the greater flexibility enjoyed in terms of "marking to market". While the value of a portfolio of publicly-listed stocks is transparent and hard to fudge, "private capital funds enjoy more leeway on how to value their assets, making returns seem much smoother."

This in turn can boost their appeal to investors (who still tend to equate price volatility ups and downs with risk), by making their "risk-adjusted" returns look healthier. Yet when investors are forced to face reality (Neil Woodford's various dud bets on unlisted companies are a good example of this), they may, as Wigglesworth puts it, "come to rue their addiction to the phoney smoothness of private capital returns".

Advertisement

Most Popular

Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020