Definition of Net Asset Value (NAV): The current market value of the underlying investments held in a fund.

What is the Net Asset Value (NAV)?

The net asset value of a fund is very similar to the book value of a company as reported on its balance sheet.

It’s the simple measure of the investments that a fund holds. An easy way for an investor to understand how much they should be willing to pay when buying units in a fund.

What type of funds have a NAV?

All collective investment funds report a NAV. This includes:

• Mutual funds
• Unit Trusts
• Open-ended investment companies
• Exchange-traded funds
• Hedge funds
• Investment trusts

Even though some of these funds are private and some are publicly listed, they all report a NAV.

Why do funds calculate and report a net asset value (NAV)?

Any good investing book will explain that funds calculate a NAV for two reasons:

1. To communicate the performance of their investments to investors. Funds such as unit trusts and OEICs are often not traded on stock exchanges, therefore investors have no public pricing information to use to understand the value of their investment in the fund. By publishing a NAV, investors can quickly calculate the value of their holdings.

2. To facilitate the buying and selling of units in the fund

3. [ETFs only] To ensure that the public pricing of their shares are consistent with the value of the fund. Day traders, hedge funds or other traders can generate profits through arbitrage if the share price of an ETF slips from its NAV.

If the NAV rises above the share price, then traders can buy the ETF at the low share price, and separate sell a basket of investments which replicates the holdings of the ETF. What this effectively achieves is a completely neutral investment position, with a small profit locked in.

This activity, plus the redemption mechanism (which I won’t go into here), nudges the ETFs share price close to its underlying NAV value whenever it deviates.

How frequently is net asset value calculated?

A fund will calculate and publish its NAV at the end of the working day.

This NAV value is used by the fund manager as the basis for internal transactions such as new investors buying units, or existing investors cashing out.

Discounts and premiums to net asset value

For investment trusts and ETFs, which report a NAV but have a share price set by the stock market, there can be significant and persistent differences between the NAV and the share price.

This is far more common in investment trusts because of their ‘closed’ capital structure. Unlike an ETF, which can effectively accept brand new inflows into the fund through a complex mechanism, investment trusts don’t accept new investment.

This means that when there’s a surge of interest in an investment trust, those additional buyers are purchasing a finite number of shares representing a finite portfolio of underlying investments.

This can lead to the share price climbing as a result of the simple supply and demand relationship.

Likewise, when investor appetite wanes, and there is more wealth trying to leave an investment trust than enter it, then the market price may well fall below NAV in order to balance the trades and find enough buyers.

Is a discount to the NAV a positive indicator?

When the share price is lower than the net asset value, it is known to be ‘trading at a discount’ or ‘priced at a discount to NAV’. Why does this sometimes happen?

Where an investment trust is publicly priced lower than its NAV, this could indicate:

• That investors believe the fund manager will poorly manage the assets going forwards. Therefore they reduce the price they are willing to pay in anticipation of the NAV falling.

• That the underlying investments have fallen out of favour with investors and there is little demand from the market to buy at a reasonable market price. An investment trust which invests in property (a REIT), could see steep discounts during a housing price collapse.

• That the underlying investments of the fund are illiquid and difficult to sell, and that there may be significant transaction costs if the fund were to actually wind up. This would mean that investors would receive less than the advertised NAV, so the discount simply reflects the transaction costs.

As you can see, in all examples a discounted trust or ETF price relative to the NAV is not necessarily a ‘bargain’. It just means that issues not reflected in the NAV have been factored into the price.

How is the phrase net asset value used in a sentence?

“The net asset value of a fund is the same as the net asset value it would report on its balance sheet were it to produce financial statements on a daily basis.”

“Followers of value investing will be deterred from investing in an investment trust which is priced at a premium over its NAV, because of the implication that they are over paying for assets.”

How does this definition of net asset value (NAV) relate to investing?

When picking funds, if you look up a private fund online, you will see its NAV price reported in place its share price. For publicly traded funds, you will see the NAV shown alongside its share price.

By understanding NAV you will understand which value is actually the buying price available to you as an investor.