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NAV isn't quite what we think

msf
in Fund Discussions
We all know that NAV = (total portfolio value)/ (shares outstanding), and

total portfolio value = Σ #shares of each security x security price

Most of us also know that security prices can be a little fuzzy if there's not a current price - because the foreign market it trades on is closed, or the security's illiquid and hasn't traded in awhile, or even if it is trading that a fund couldn't really sell it on the open market. See, e.g. Fair value pricing, or Heartland High-Yield Muni and Short-Duration Muni Bond Funds scandal, or Third Avenue Focused Credit TFCVX.

I didn't know that the number of shares of each security is also suspect.

Apparently, virtually all funds use the number of shares that it held the previous day to calculate the NAV. For example, the NAV of a fund tonight (May 6th) is likely computed by taking the number of shares of each security it held at the close of May 5th and multiplying it by tonight's closing price.

This is not required (funds could use today's holdings), but it is allowed. In the vast majority of pricings, the effect is minuscule, but it does raise the question: do you know what's in your wallet (portfolio)?

For a column on this, see: ETF.com, Net Asset Values Can Fool You
For a paper on this, see: Live Prices and Stale Quantities: T+1 Accounting and Mutual Fund Mispricing (2006)

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