Net asset value
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Prime Brokerage Anatomy™
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Known colloquially as “NAV”, net asset value is the value of an investment fund from the investor’s perspective. Generally assets minus liabilities: assets being the investments your investment manager has put you into; liabilities usually taking the shape of money borrowed by the fund to lever up your investment, which you have to pay back first — your name is Vega, and you live on the second floor — and any unfunded investments (like swaps) that happen to be under water for the time being.
NAV can be defined across the whole fund — a gross number, like U.S.$5bn — or per share (if you have 1,000,000 shares in issue, U.S.$5bn/1,000,000 = U.S.$5,000. While these things like different ways of saying the same thing, note the different effect here of fund redemptions versus decline in investment value.
Say the portfolio declines in value by a billion, but no-one redeems. Now outright NAV is U.S.$4bn, and NAV per share is U.S.$4,000.
But if 200,000 shareholders redeem out of the fund, but the assets in the fund maintain their value, while you have still lost a billion from the fund and your outright NAV is still U.S.$4bn, NAV per share remains at U.S.$5,000.
In one way, an investor redemption is more benign than a decline in asset values, seeing as the actual investments are performing just as well, just on a smaller base — and you would expect a prudent investment manager to cut the size of its derivative positions by a proportional amount, to match the size of the adjusted portfolio. But investment managers might not always do that — especially if they are being risked on a NAV per share basis.
Realistically, the two tend to be closely correlated. If the fund’s performance is going gang busters, people tend to HODL. If, on the other hand, it’s going full Neil Woodford, expect to see big investor outflows, at which point hello redemption gate buried on page 94 of the prospectus.
Net asset value and “pension liabilities”
Pension funds will usually describe their net asset value calculations as excluding pension liabilities. This is a bit baffling at first, but from a broker’s perspective — especially in the context of a NAV trigger Additional Termination Event — we think it’s okay.
In an ordinary fund, the investor is a shareholder, languishing with all that lovely alpha in the sludge at the bottom of the capital structure. They are equity participants and the fund’s obligations to them are not even “liabilities” as such — a liability implies a debt, and equity-holders are owners, not creditors, and their ownership interest is defined to be the value of the assets after accounting for all liabilities (being those owed to counterparties, brokers and so on).
In a pension fund, one talks of the fund’s liabilities to pension-holders. Now those liabilities can only be satisfied out of that equity holding, and is either an equity interest itself, or it is a subordinated liability, ranking behind secured and unsecured creditors (like swap counterparties), or being limited in recourse to the net value of the fund’s assets after all its senior debt liabilities are satisfied, so you get to the same place.
In any case in the context of a NAV trigger, getting this definition wrong (and including pension liabilities) might mean you spend your life waiving technical, but actually unimportant, breaches of the NAV trigger.