Chapter 7 - NAV

Question 1

Purpose of NAV

Answer 1

NAV is the value of a fund at a specific date in time - can also be expressed per share in issue

NAV is assets minus liabilities

NAV can be an indicator of performance and can be used to compare like for like fund performance - bearing in mind that it is a historic figure

NAV can also be used in pricing of open ended funds

Fund administrator is responsible for the calculation of the NAV

Question 2

Relationship between NAV and performance

Answer 2

NAV can be useful when comparing the performance of a fund to another (like for like) but it is not a diminutive indicator of performance

Fund performance can be impacted by many factors such as general market conditions, manager’s decisions - which need be evaluated also when considering overall fund performance

Some factors affecting NAV and fund performance will be within the manager control (investment selection, timing of investments and selection of associated parties) others will not (general market conditions, exchange rates, unforeseen events)

Question 3

NAV for closed ended funds

Answer 3

closed ended funds calculate NAV not for pricing purposes (although it does impact pricing of units sold on secondary market)

NAV calculation in the closed ended funds is used more as an indicator of underlying value for investors (new and existing)

If issuing new share the dealing price would likely be based on the NAV to a certain extent

NAV tends to be calculated less often for a closed ended fund - qtly or so

Question 4

NAV for open ended funds

Answer 4

Open ended funds tend to deal daily and the price of the fund and NAV of the fund are directly and positively correlated

If NAV goes up so does the dealing price of the fund - as it is an indicator of the underlying value of the fund

NAV for open ended funds tends to be calculated daily as a result - ensure that dealing price is accurate

Question 5

Underlying nature of assets and NAV

Answer 5

If assets are liquid (meaning that there is a market for them) then valuations are easier to obtain - securities and bonds can be valued on Bloomberg for example

Open ended funds tend to deal in liquid assets which makes NAV calculation much easier

Funds that deal in illiquid funds may find it difficult to value these (private equity and real estate funds) and these tend to be closed ended and their NAV calculated less often

Valuations used for the purposes of NAV need to be independent - to ensure that NAV is not subject to manipulation - usually cross checked with different sources

Question 6

Consequences of incorrectly calculating the NAV

Answer 6

Financial

There may a financial loss or gain to an investor or the fund due to an error - particularly with an open ended fund where the NAV is used for pricing (indirectly used for closed ended funds on secondary market also)

If the fund has been over priced the fund will have overpaid those redeeming and overcharged those inverting - administrator may need to pick up the shortfall if this cannot be rectified

In an open ended fund this can be costly especially if not picked up early enough - could lead the fund or the administrator to fail

Reputational

Errors lead to a lack of confidence especially on investors part - could devastate the manager and administrators businesses

Regulatory

All instances of NAV errors need to be recorded and any significant errors (those the affect the normal dealing of the fund) must be report to the regulator

Any patterns of errors also need of be reported

Regulators can impose sanctions, fines and even remove licenses is there is a persistent breach or significant error

Can even demand that the fund trading halt which could have huge repercussions for the fund