Investment trusts 101 - net asset value

Here we learn more on the net asset value of a trust and why it is important for investors


The net asset value (NAV) indicates how much an investment trust is worth.

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

The NAV is in the hands of the fund manager, whose job is to grow the assets of the company by picking good investments: observing the NAV performance over the years can give a hint on the company’s strategy and execution.

Usually companies publish their NAVs every day, although reports may come monthly or quarterly if it takes longer to evaluate assets.

The NAV is usually divided for the total number of outstanding shares to provide a benchmark for investors: many will compare the NAV per share to the current share price before writing a cheque.

But the NAV and the share price are two quite different things. 

The NAV indicates how much an investment trust’s assets are actually worth, while the share price will tell how much ‘the market’ is willing to pay to hold the trust’s shares.

The share price could rise beyond the asset valuations for instance if the trust operates in an industry which is in demand and is attracting lots of interest from investors. In such an example, the NAV itself would remain the same, still reflecting the actual worth of the underlying assets regardless of the stock market popularity contest.

Trading at a premium

If the NAV per share is lower than the share price, then the investment trust is trading at a “premium”. 
Basically, this is means the share is (in demand) and therefore investors will pay in excess of what the assets are otherwise worth.

Trading at a discount

Conversely, if the NAV per share is higher than the share price, the company will trade at a “discount”. 

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

The risk

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

However, if events do not go as hoped and the shares move to a discount, losses can be significant. Not only will they incur the penalty of lower valuation, but, also the premium price will likely also unwind.

It is perhaps unsurprising that premium-priced funds are comparatively less common.

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

Put simply, this can present a buying opportunity: so long as there aren’t good reasons why the market undervalues the trust’s assets.

When an investor buys at a discount, and that discount narrows, so the share price gets closer to the NAV. 

An investor will have made some gains, even though the underlying value of the company’s assets may not have changed. Conversely, the opposite may transpire if the discount widens.

As the AIC points out, investments in trusts should be made with a long-term outlook, so there are always chances for the share price to grow.

Investors should nonetheless be mindful of NAV when selecting which trusts to buy into.

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