• Christian Armbruester

NAV Hell



Why calculating the performance of our investments is as much art as it is science.


Not surprisingly, buying a fund to manage our investments is not like purchasing a yogurt at the supermarket. The reason for this is rather obvious in that we either make or lose money in the things that we buy or sell as part of the strategy. Moreover, there are many other moving parts to calculating the so-called Net Asset Value (NAV), which determines the price at which we can buy or sell our funds. It is why so many investment professionals dread the end of the month.


It usually takes about a week to finalise the NAV. For the most part, that is because of the fund expenses which have to be reconciled, amortised, and allocated. For the average fund, there are dozens of individual cost items, such as the administration, custody, audit, or fund set up costs. Some are fixed, others are variable and many are in different currencies, which brings us to my favourite topic and the FX.


When a fund has different currency classes, it means that the investment manager has to hedge the exposure. Using forwards to protect against currency risk is one thing, but how the administrator deals with the costs is quite another. Forward contracts expire, whereas funds do not. If the timing does not coincide with month end, there are the unrealised profits or losses to deal with, and how to mark these is subject to change. That has to do with the cost of the roll of the forward contracts from one month to the other, and who is going to pay for that is anyone’s guess.


Then there is the valuation of the underlying investment instruments. Corporate actions such as dividends, rights issues, or stock splits can cause utter havoc when trying to account for the correct pricing in a given month. Some instruments are also more liquid than others, so the fair value can sometimes be hard to come by. The whole thing gets exponentially more complicated when you use financial derivatives which tend to trade twenty four hours a day. For the purposes of calculating the NAV, do you take the price at the close of business, the end of day and for which time zone?


Once you get into so called over the counter (OTC) instruments, you begin to lose the will to live as the pricing is dependent on the counterparty to deliver. Do you mark the price to the Bid or the Ask, and do you agree with their pricing? Maybe they have also made a mistake, given all the things they have to do to calculate their NAV? But that’s not all, people also make mistakes, and sometimes the administrator will pick the wrong price as their system has pulled in a different ticker. If that’s not enough, there is also fraud. I once booked a trade at the wrong price only to find out that the counterparty had matched mine, because it was in their favour, making a mockery of the entire concept of reconciliation.


All in all, it is a horrible process and before you say UCITS funds produce NAVs on a daily basis, well there is a reason why they underperform. Clearly, there is a cost to perform all of the afore mentioned tasks. So, the next time you receive your NAV from your friendly local neighbourhood fund manager, think of all the hard work that goes into producing what is seemingly a very simple number. You may also wish to thank your lucky stars if you don’t have to go through this process on a regular basis.


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