Net asset value
Encyclopedia
Net asset value is a term used to describe the value of an entity's asset
s less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual
funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. However, the term may also be used as a synonym for book value
or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding
held by investors and, thereby, represent the net asset value per share.
Net asset values and other accounting and recordkeeping activities are the result of the process of Fund Accounting, sometimes called securities accounting, investment accounting and/or portfolio accounting. Fund Accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued on a regular schedule such as daily, weekly or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valuing assets and liabilities
for the purposes of calculating net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulatory and/or accounting principles that may apply. For example, for US registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices (meant to represent fair value), typically 4:00 PM Eastern Time. For US registered money market funds, investments are often carried or valued at 'amortized cost' as opposed to market value for expedience and other purposes, provided various requirements are continually met.
At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are 'closed' enabling a variety of information to be calculated and produced including the net asset value per share.
in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash.
As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240MM, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6 of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses.
The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as US$160MM (and the NAV per share as $160), the investor would have been given 250,000 shares and would become entitled to 1/5 of the fund's value.
In contrast, closed-end fund
s are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV.
(such as a US mutual fund
or a hedge fund
) is calculated by reference to the total value of the fund's portfolio
(its assets) less its accrued liabilities (money owed to lending banks, fees owed to investment managers and service providers and other liabilities).
The portfolio's assets are generally valued by objective criteria established at the outset of the fund. Where assets are traded on a securities exchange or cleared through a clearing firm, the most common method of valuation is to use the market value
of the assets in the portfolio
(using, for example, the closing bid price
or last traded price). The value of OTC
derivatives may be provided by the counterparty to the derivative, who may be trading similar derivatives with other parties. Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods subject to a fund's directors or trustees is usually used.
are a cheap or expensive investment
, one tool used by investors is a comparison of the company's current market capitalization
(being the price at which the market values the company) with its NAV. The NAV may be below the market price for the following reasons:
A company's market value will not always be greater than its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007. Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern
.
In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value
, the historical cost
or the amortised
cost of the company's assets, or an appropriate combination of the three.
s (REITs - pronounced "Reets"). NAV is normally quoted "per investment unit" where the value is divided by the number of total outstanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per-unit NAV serves as the yardstick for assessment. The NAV index is synonymous to the adjusted price-to-book ratio applied in the world of stocks in which factors such as unrealized losses/gains of owned properties and brand values are reflected. News companies such as PropertyMall
typically report on a REITs NAV when the company reports it.
policies and variable annuity contracts often are structured somewhat similar to mutual funds, and they may vary in value as securities and markets fluctuate. Typically, these insurance or annuity products issue 'units' of ownership to policyholders/annuitants in exchange for their investment—similar to shares of a mutual fund. Also similar to a fund, the assets, liabilities and net assets of these product entities are valued periodically resulting in an asset unit value or AUV or UAV per share - analogous to NAV for a fund.
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. However, the term may also be used as a synonym for book value
Book value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding
Shares outstanding
Shares outstanding are common shares that have been authorized, issued, and purchased by investors. They have voting rights and represent ownership in the corporation by the person or institution that holds the shares. They should be distinguished from treasury shares, which is common stock held by...
held by investors and, thereby, represent the net asset value per share.
Net asset values and other accounting and recordkeeping activities are the result of the process of Fund Accounting, sometimes called securities accounting, investment accounting and/or portfolio accounting. Fund Accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued on a regular schedule such as daily, weekly or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valuing assets and liabilities
Valuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...
for the purposes of calculating net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulatory and/or accounting principles that may apply. For example, for US registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices (meant to represent fair value), typically 4:00 PM Eastern Time. For US registered money market funds, investments are often carried or valued at 'amortized cost' as opposed to market value for expedience and other purposes, provided various requirements are continually met.
At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are 'closed' enabling a variety of information to be calculated and produced including the net asset value per share.
Open-ended funds
Net asset value is most commonly used in the context of open-ended funds. Shares and interestsPartnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
in such funds are not traded between investors, but are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash.
As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240MM, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to 1/6 of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses.
The valuation of the assets and liabilities of an open-ended fund is therefore very important to investors. If the NAV in the above example had, with the same assets, been calculated as US$160MM (and the NAV per share as $160), the investor would have been given 250,000 shares and would become entitled to 1/5 of the fund's value.
In contrast, closed-end fund
Closed-end fund
A closed-end fund is a collective investment scheme with a limited number of shares. It is called a closed-end fund because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates.Typically an...
s are traded in the open market between investors and so the price of shares or interests in a closed-end fund will be whatever the parties agree it to be, which may not correspond to the fund's NAV. Publicly traded shares in such funds generally trade at a price below NAV.
Valuation of assets in open-ended funds
The NAV of a collective investment schemeCollective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
(such as a US mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
or a hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
) is calculated by reference to the total value of the fund's portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
(its assets) less its accrued liabilities (money owed to lending banks, fees owed to investment managers and service providers and other liabilities).
The portfolio's assets are generally valued by objective criteria established at the outset of the fund. Where assets are traded on a securities exchange or cleared through a clearing firm, the most common method of valuation is to use the market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
of the assets in the portfolio
Portfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
(using, for example, the closing bid price
Bid price
A bid price is the highest price that a buyer is willing to pay for a good. It is usually referred to simply as the "bid."In bid and ask, the bid price stands in contrast to the ask price or "offer", and the difference between the two is called the bid/ask spread.An unsolicited bid or purchase...
or last traded price). The value of OTC
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
derivatives may be provided by the counterparty to the derivative, who may be trading similar derivatives with other parties. Where there is no objective method of calculating the value of an asset, the fund manager's own valuation methods subject to a fund's directors or trustees is usually used.
Businesses
Turning to operating companies as opposed to investment companies (mutual funds), in determining whether shares in a public companyPublic company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
are a cheap or expensive investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, one tool used by investors is a comparison of the company's current market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
(being the price at which the market values the company) with its NAV. The NAV may be below the market price for the following reasons:
- The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV. Also, accounting principles and basis of presentation of amounts in financial statements vary around the globe, further blurring the comparability of companies in various jurisdictions.
- The current value of a company's assets likely differ than the historical cost financial statementsFinancial statementsA financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
used in the NAV calculation (and financial statement values and related principles of accounting vary from
- Certain assets, such as goodwillGoodwill (accounting)Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...
(which broadly represents a company's ability to make future profits), are not necessarily included on a balance sheet and so will not appear in an NAV calculation.
A company's market value will not always be greater than its NAV. For example, analysts and management estimated that Liberty Media Corporation was trading for 30-50% below its net asset value (or "core asset value") in June 2007. Where a company's market value is lower than its NAV, it may be considered more profitable to wind the company up and sell off its assets individually rather than continue to run it as a going concern
Going concern
A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.-Definition of the 'going concern' concept:...
.
In contrast to fund valuation, the assets of a company will generally be valued for the purpose of a NAV calculation using the book value
Book value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
, the historical cost
Historical cost
In accounting, historical costs is the original monetary value of an economic item. Historical cost is based on the stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, as if there had been no change in value since the date of...
or the amortised
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...
cost of the company's assets, or an appropriate combination of the three.
Real estate investment trusts
NAV is one of the valuation indices of real estate investment trustReal estate investment trust
A real estate investment trust or REIT is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors...
s (REITs - pronounced "Reets"). NAV is normally quoted "per investment unit" where the value is divided by the number of total outstanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per-unit NAV serves as the yardstick for assessment. The NAV index is synonymous to the adjusted price-to-book ratio applied in the world of stocks in which factors such as unrealized losses/gains of owned properties and brand values are reflected. News companies such as PropertyMall
PropertyMall
Property Mall is one of the leading online news and property search service which covers the UK and European commercial property market.It is one of the main providers of news on commercial property, and is the only edited provider of news on commercial property whose content is free.The commercial...
typically report on a REITs NAV when the company reports it.
Variable insurance and variable annuity contracts
Variable universal life insuranceVariable universal life insurance
Variable Universal Life Insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner...
policies and variable annuity contracts often are structured somewhat similar to mutual funds, and they may vary in value as securities and markets fluctuate. Typically, these insurance or annuity products issue 'units' of ownership to policyholders/annuitants in exchange for their investment—similar to shares of a mutual fund. Also similar to a fund, the assets, liabilities and net assets of these product entities are valued periodically resulting in an asset unit value or AUV or UAV per share - analogous to NAV for a fund.