Institutional investors analyzing their passive global ex-U.S. equity portfolios may occasionally encounter a surprising result: A portfolio designed to track an index can show an unusually large short-term difference in return relative to its benchmark—or even meaningful excess return over a brief period.

A concept known as fair value pricing (FVP) can help explain why.

What Is Fair Value Pricing?

Many global ex-U.S. equity markets close several hours before the U.S. market. During that gap, material information can emerge that affects the value of securities traded on those markets. But because those markets have closed, their securities cannot immediately reflect that new information through market prices.

Investment managers may address this situation by adjusting portfolio valuations when the local closing price is no longer considered representative of current fair value. In effect, FVP allows a portfolio’s net asset value (NAV) to incorporate relevant information that becomes available after a foreign market has closed but before the portfolio is valued.

Because fair value methodologies can differ among investment managers, institutional investors should understand how their managers determine when an adjustment is warranted and how those adjustments are calculated.

FVP can therefore create a temporary difference between a portfolio’s reported return and its benchmark because the portfolio and the index may incorporate market information at different points in time.

An Unusual Quarter-end Example

The end of 1Q26 provided a particularly clear illustration of the potential impact. By the time U.S. equities rallied late on March 31 amid signs that the Iran conflict might be moving toward de-escalation, many global ex-U.S. markets had already closed. For portfolios that applied fair value adjustments to reflect this new information, the adjustments were incorporated into the quarter-end NAV.

That timing mattered. Because March 31 marked the end of the quarter, the adjustments flowed directly into reported 1Q26 performance. The result was a short-term positive excess return for passive global ex-U.S. portfolios.

And the effect was not limited to a single investment manager. Data showed similar patterns among three major industry index managers with strategies benchmarked to the MSCI EAFE Index.

What Investors Should Understand

The 1Q26 results tell only half of the story. In this context, the impact of fair value pricing primarily represented a timing difference. When global ex-U.S. markets reopened in early April, local prices incorporated the same market developments that had already been reflected in the portfolio’s fair value adjustments. As a result, much of the portfolio’s 1Q26 relative advantage unwound during 2Q26, producing relative underperformance during the subsequent period.

Viewed separately, the two quarters might suggest that passive managers first beat their benchmarks and then lagged them. Viewed together, they demonstrate how differences in market closing times and valuation methodologies can temporarily affect reported performance.

This distinction matters when institutional investors evaluate index strategies. A short-term divergence from a benchmark does not necessarily indicate that a passive manager has departed from its mandate or made an active investment decision. In some cases, the apparent divergence may instead reflect differences in how and when securities were valued.

The key is the time horizon. Fair value pricing seeks to incorporate the most current available market information into portfolio valuations, but doing so can temporarily affect benchmark-relative results. Over longer periods, these timing differences would generally be expected to diminish or offset and, by themselves, should not be a meaningful driver of long-term relative performance.

For institutional investors, understanding that mechanism can provide important context when an otherwise closely tracking global ex-U.S. equity portfolio suddenly appears to stray from its benchmark.