Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== nav ====== ===== The 30-Second Summary ===== * **The Bottom Line:** **NAV, or Net Asset Value, tells you the true per-share value of a fund's underlying assets, helping you determine if you're getting a fair price, a bargain, or are at risk of overpaying.** * **Key Takeaways:** * **What it is:** NAV is a fund's total assets (like stocks and bonds) minus its total liabilities (like fees and debts), all divided by the number of shares outstanding. * **Why it matters:** It acts as the "intrinsic value" for a share of a fund. For [[closed-end_fund|closed-end funds]], comparing the market price to the NAV is a primary way to find potential bargains, a core tenet of value investing. * **How to use it:** Use NAV to track the performance of a mutual fund and, more importantly, to hunt for funds trading at a significant "discount" to their NAV, creating a potential [[margin_of_safety]]. ===== What is NAV? A Plain English Definition ===== Imagine you have a shopping cart filled with groceries. Inside, you have a carton of milk ($4), a loaf of bread ($3), a dozen eggs ($5), and a block of cheese ($8). The total value of everything in your cart is $20. This is the cart's "Gross Asset Value." Now, let's say the grocery store charges you $0.50 for the paper bag itself. This is a liability, a cost you have to pay. To find the "Net Asset Value" of your grocery-filled cart, you simply take the total value of the items ($20) and subtract the cost of the bag ($0.50). The NAV of your shopping trip is $19.50. It's the real, underlying worth of what you're holding. In the investment world, a fund (like a [[mutual_fund]] or a [[closed-end_fund]]) is just a big shopping cart. Instead of milk and eggs, it holds assets like shares of Apple, government bonds, or real estate. And just like the paper bag, the fund has liabilities—small costs like manager salaries, administrative fees, and other operational expenses. **Net Asset Value (NAV)** is the result of taking all the fund's assets, subtracting all its liabilities, and then dividing that number by the total number of shares the fund has issued. The result is a simple, per-share price that tells you: "If we liquidated this entire fund today and paid off all our debts, this is the amount of cash each share would be worth." It's the fund's bedrock value, stripped of market hype and sentiment. > //"Price is what you pay. Value is what you get." - Warren Buffett// This quote is the essence of why NAV matters. The market price of some funds can swing wildly based on fear and greed, but the NAV remains a steadfast anchor to the actual value of the underlying businesses the fund owns. ===== Why It Matters to a Value Investor ===== For a value investor, the world revolves around a single, powerful idea: buying something for less than its true, underlying worth, which we call its [[intrinsic_value]]. NAV is one of the clearest expressions of this concept in the world of funds. **1. The Ultimate Reality Check:** The stock market is a popularity contest in the short term. A "hot" fund can see its share price bid up by excited crowds, while an unloved fund can be left in the bargain bin. NAV cuts through this noise. It doesn't care about popularity; it only cares about the mathematical value of the assets in the portfolio. A value investor uses NAV as an anchor to reality, preventing them from getting swept up in speculative manias. **2. The Hunt for Discounts (The Built-in Margin of Safety):** This is where NAV becomes a value investor's best friend. While mutual funds and most ETFs trade at or very near their NAV, **closed-end funds (CEFs)** trade on the stock exchange like regular stocks. This means their market price can—and often does—deviate from their NAV. * When a CEF's market price is //below// its NAV, it's said to be "trading at a discount." * When its market price is //above// its NAV, it's "trading at a premium." A value investor salivates at the prospect of a discount. Buying a well-run CEF at a 15% discount to its NAV is like getting $1.00 worth of quality stocks and bonds for just $0.85. This 15-cent difference is a textbook example of Benjamin Graham's [[margin_of_safety]]. It provides both a cushion against potential losses and a greater potential for upside if the discount narrows over time. **3. A Clear Measure of Performance:** For any fund, the growth of its NAV over time (assuming dividends are reinvested) is the ultimate measure of the manager's skill. It shows how well they have grown the "shopping cart's" value. A value investor isn't impressed by a skyrocketing share price caused by a shrinking discount; they are impressed by a steadily growing NAV, which proves the underlying assets are being managed wisely. ===== How to Calculate and Interpret NAV ===== === The Formula === The formula for NAV is straightforward and is calculated by the fund company at the end of every trading day. `NAV per Share = (Total Market Value of Fund Assets - Total Fund Liabilities) / Total Number of Outstanding Shares` Let's break that down: * **Total Assets:** This is the sum of the current market value of every single security (stock, bond, etc.) and all the cash the fund holds. * **Total Liabilities:** This includes all the fund's expenses that have been incurred but not yet paid. Think of management fees, administrative costs, marketing expenses, etc. * **Outstanding Shares:** This is the total number of shares the fund has issued to investors. === Interpreting the Result === What the NAV means to you depends entirely on the type of fund you are looking at. ^ **Fund Type** ^ **How Price Relates to NAV** ^ **What It Means for a Value Investor** | | **Mutual Fund** | You always buy and sell shares directly from the fund company at the NAV price calculated at the end of the day. The price **is** the NAV. | NAV is primarily a tool for tracking performance. You can't buy it at a discount. Your focus is on the quality of the holdings and the manager's skill in growing the NAV. | | **ETF** | Trades on an exchange, but market makers constantly create/redeem shares to keep the market price //extremely// close to the NAV. | The price and NAV are almost always in lock-step. Large deviations are rare and short-lived. Like mutual funds, NAV is mainly for performance tracking. | | **Closed-End Fund (CEF)** | Trades on an exchange with a fixed number of shares. The market price is driven by supply and demand and can stray far from the NAV. | **This is the main event.** A significant discount to NAV can represent a powerful [[margin_of_safety]] and a potential investment opportunity. A premium is a major red flag. | ===== A Practical Example ===== Let's analyze a hypothetical closed-end fund: the "**Bedrock Value Fund (ticker: ROK)**". ROK has a simple portfolio and some minor expenses. **1. Calculate the Assets:** * 1,000,000 shares of Steady Brew Coffee Co. (@ $50/share) = $50,000,000 * 500,000 shares of Reliable Utility Inc. (@ $80/share) = $40,000,000 * Cash in the bank = $10,000,000 * **Total Assets = $100,000,000** **2. Subtract the Liabilities:** * Accrued management fees for the quarter = $200,000 * Office and administrative costs payable = $50,000 * **Total Liabilities = $250,000** **3. Find the Net Assets:** * $100,000,000 (Assets) - $250,000 (Liabilities) = **$99,750,000** **4. Divide by Shares Outstanding:** * The fund has 5,000,000 shares outstanding. * **NAV per Share = $99,750,000 / 5,000,000 = $19.95** So, the true, underlying value of one share of the Bedrock Value Fund is **$19.95**. Now, you check the stock market, and you see that ROK is trading for **$16.96** per share. **The Value Investor's Insight:** You immediately recognize an opportunity. The fund is trading at a discount. * **Discount Amount:** $19.95 (NAV) - $16.96 (Price) = $2.99 per share * **Discount Percentage:** ($2.99 / $19.95) x 100 = **15%** By buying shares of ROK at $16.96, you are effectively purchasing $19.95 worth of solid, reliable assets. You are getting $1.00 of value for about 85 cents. This 15% discount is your [[margin_of_safety]]. If the market recognizes this inefficiency and the discount narrows, or if the underlying assets perform well, you stand to profit handsomely. ===== Advantages and Limitations ===== ==== Strengths ==== * **Objective Benchmark:** NAV is calculated using transparent market prices and accounting rules. It provides a hard, objective measure of a fund's per-share worth, free from emotional bias. * **Uncovers Opportunities:** For CEFs, comparing the market price to NAV is the single most effective tool for spotting potential bargains (discounts) and avoiding overpriced assets (premiums). * **Clear Performance Metric:** The change in a fund's NAV over time (with distributions added back) is a pure reflection of the investment manager's ability to generate returns from the underlying assets. ==== Weaknesses & Common Pitfalls ==== * **A Discount Isn't a Guarantee:** A large discount doesn't automatically mean a fund is a good investment. You must ask //why// the discount exists. It could be due to a terrible manager, a flawed strategy, excessively high fees, or a portfolio of low-quality assets. Always do your [[due_diligence]]. * **The [[value_trap]] Risk:** Some funds trade at a persistent discount for years and may never see that discount narrow. A cheap fund can always get cheaper. The discount itself is not a catalyst; you need to have a reason to believe it will close in the future. * **Unreliable for Illiquid Assets:** NAV is most reliable when the underlying assets (like public stocks) have readily available market prices. For funds that own private businesses, complex derivatives, or illiquid real estate, the "Assets" portion of the calculation may be based on stale or subjective internal appraisals, making the stated NAV less trustworthy. ===== Related Concepts ===== * [[margin_of_safety]] * [[intrinsic_value]] * [[closed-end_fund]] * [[mutual_fund]] * [[exchange-traded_fund_etf|Exchange-Traded Fund (ETF)]] * [[book_value]] * [[value_trap]]