Investment Trusts 101 – Net Asset Value


The net asset value (NAV) indicates the value of an investment trust.

It is calculated by adding the total value of its assets minus its liabilities, which are outflows of money, such as payments.

The NAV is in the hands of the fund manager, whose job it is to grow the company’s assets by choosing good investments: observing the performance of the NAV over the years can give a clue about the strategy and running the business.

Usually, companies publish their net asset values ​​daily, although reports can be monthly or quarterly if more time is needed to value assets.

The net asset value is usually divided for the total number of shares outstanding to provide a benchmark for investors: many will compare the net asset value per share to the current stock price before issuing a check.

But net asset value and stock price are two very different things.

Net asset value indicates the true value of an investment trust’s assets, while the stock price will indicate how much “the market” is willing to pay to own the shares of the trust.

The share price could rise above asset valuations, for example if the trust operates in a demand sector and attracts a lot of investor interest. In such an example, the net asset value itself would remain the same, always reflecting the true value of the underlying assets, regardless of the stock market popularity contest.

Trading at a premium

If the net asset value per share is lower than the stock price, the investment trust is trading at a “premium”.
Basically, this means that the stock is (in demand) and therefore investors will pay more than the assets are otherwise worth.

Discount trade

Conversely, if the net asset value per share is higher than the stock price, the company will trade at a “discount”.

In other words, investors can pocket these shares for less than the underlying value of the assets of the trust.

The risk

When buying at a premium, investors are paying for the quality of the trust and its potential to grow over time.

However, if events do not turn out as hoped and stocks suffer a discount, the losses can be significant. Not only will they suffer the penalty of a lower valuation, but the premium price will likely subside as well.

It is perhaps unsurprising that premium funds are relatively less common.

According to industry body Association of Investment Companies (AIC), most companies tend to trade at a discount.

Simply put, this may present a buying opportunity: as long as there are no good reasons why the market is undervaluing the assets of the trust.

When an investor buys at a discount and that discount narrows, the stock price approaches the net asset value.

An investor will have made gains even though the underlying value of the company’s assets may not have changed. Conversely, the reverse may occur if the haircut widens.

As the AIC points out, investments in trusts should be made with a long-term perspective, so there is always a chance that the stock price will rise.

Investors should, however, keep net asset value in mind when selecting trusts to invest in.


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