National Grid 2012 Annual Report Download - page 42

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41
active markets, and are classified as Level 2 investments. Investments in funds with redemption restrictions and use
NAV are classified as Level 3 investments.
Fixed income securities
Fixed income securities (which include corporate debt securities, municipal fixed income securities, US Government and
Government agency securities including government mortgage backed securities, index linked government bonds, and
state and local bonds) convertible securities, and investments in securities lending collateral (which include repurchase
agreements, asset backed securities, floating rate notes and time deposits) are valued with an institutional bid valuation.
A bid valuation is an estimated price at which a dealer would pay for a security (typically in an institutional round lot).
Oftentimes, these evaluations are based on proprietary models which pricing vendors establish for these purposes. In
some cases there may be manual sources when primary vendors do not supply prices. Fixed income investments are
primarily comprised of fixed income securities and fixed income funds. The prices for direct investments in fixed income
securities are generated on a daily basis. Like the equity securities, fair values generated from active trading on
exchanges are classified as Level 2 investments. Prices generated from less active trading with wider bid ask prices are
classified as Level 2 investments. If prices are based on uncorroborated and unobservable inputs, then the investments
are classified as Level 3 investments. Funds with publicly quoted prices and active trading are classified as Level 1
investments. For funds that are not publicly traded and have ongoing subscription and redemption activity, the fair value
of the investment is the NAV per fund share and is classified as Level 2 investments. Investments in funds with
redemption restrictions are classified as Level 3 investments.
Global tactical asset allocation
Assets held in global tactical asset allocation funds are managed by investment managers who use both top-down and
bottom-up valuation methodologies to value asset classes, industrial sectors, and individual securities in order to allocate
and invest assets opportunistically. If the inputs used to measure a financial instrument fall within different levels of the
fair value hierarchy within the fund, the categorization is based on that financial instrument. These assets are invested
through funds, which are classified as Level 2. Level 3 assets are classified when fund prices are based on
uncorroborated and unobservable inputs.
Private equity and real estate
Commingled equity funds, commingled special equity funds, limited partnerships, real estate, venture capital and other
investments are valued using evaluations (NAV per fund share), based on proprietary models, or based on the net asset
value.
Investments in private equity and real estate funds are primarily invested in privately held real estate investment
properties, trusts, and partnerships as well as equity and debt issued by public or private companies. The Company’ s
interest in the fund or partnership is estimated at NAV. The Company’ s interest in these funds cannot be readily
redeemed due to the inherent lack of liquidity and the primarily long-term nature of the underlying assets. Distribution is
made through the liquidation of the underlying assets. The Company views these investments as part of a long-term
investment strategy. These investments are valued by each investment manager based on the underlying assets. The
majority of the underlying assets are valued using significant unobservable inputs and often require significant
management judgment or estimation based on the best available information. Market data includes observations of the
trading multiples of public companies considered comparable to the private companies being valued. The funds utilize
valuation techniques consistent with the market, income, and cost approaches to measure the fair value of certain real
estate investments. As a result, The Company classifies these investments as Level 3 investments.
While management believes its valuation methodologies are appropriate and consistent with other market participants,
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result
in a different fair value measurement at the reporting date.