NAV components and its role in investment strategies | FlexFunds (2024)

  • Solutions
  • - July 23, 2024

Authored by FlexFunds

NAV components and its role in investment strategies | FlexFunds (1)

NAV components and its role in investment strategies | FlexFunds (2)

  • The NAV (Net Asset Value) is a critical concept in the investment funds and exchange traded products (ETPs) industries; it represents the intrinsic value per unit of these financial instruments. The distribution of this value offers increased transparency and more information for the participants. A clear picture of how NAV is calculated is essential when launching a fund to the market.
  • The defined investment strategy will affect the asset classes and costs of the vehicle and influence the frequency at which the product price is updated.
  • Through FlexFunds’ asset securitization program, asset managers can repackage multiple investment strategies, with services such as automated NAV calculation and distribution via leading financial data and price disseminators like Bloomberg and SIX Financial. To learn more about it, contact our team to determine which solution suits your needs.

Regardless of the strategy, underlying, or asset class that comprises an investment fund, a fundamental characteristic for the fund is its pricing. Although, in the short term, Exchange Traded Funds (ETFs) prices can be impacted by supply and demand forces, the variable that balances the market and acts as a pricing reference is the NAV (Net Asset Value). We mention balance and reference, given that when the price of an ETF trades above the NAV, the authorized participant or liquidity provider of the ETF will exploit this arbitrage opportunity until the market value converges with the NAV. Likewise, when the price is below the NAV, the market maker of the fund will identify this inefficiency, and the price will end up balancing.

Even though all the products that have a NAV will not necessarily have an authorized participant (usually, the authorized participant will exercise the market maker role as well), any imbalances and discrepancies between the net asset value and market value, at which the financial instrument can be acquired, will be spotted and eventually corrected by an arbitrage effect.

Now, what is the NAV? The net asset value represents the intrinsic value per share of vehicles such as ETFs (Exchange Traded Funds), ETNs (Exchange Traded Notes), UITs (Unit Investment Trusts), and CEFs (Closed End Funds), among others. The NAV is a pivotal concept that provides transparency for investors and allows them to track the value and performance of these financial instruments. FlexFunds ensures that the NAV of all the ETPs (Exchange Traded Products) issued under their global notes program are disseminated through the leading market data platforms like the cases of Bloomberg, Refinitiv, and SIX Financial.

Having more clarity about the concept and its relation to investment funds and the different ETP types, let’s delve into how NAV is calculated and its components.

NAV components and its role in investment strategies | FlexFunds (3)
  1. Total Assets. Composed of the total AUM (Assets Under Management). The asset classes will vary depending on the fund’s strategy; for example, a fund focused on liquidity and with a low-risk tolerance will hold assets such as treasury bonds, certificates of deposit, cash, and any accrued income under these securities. Conversely, a fund with a growth target and willingness to take further risks will be structured by stocks, alternative assets, and derivatives, among others. The frequency with which the total assets are priced will be directly related to the type of asset, as the underlying liquidity will influence the periodicity with which it can be valued and marked- to-market. In the case of the Flex Private Program, generally used to securitize illiquid assets, as is the case for real estate projects, the valuation will be performed on a monthly basis. On the other hand, the FlexPortfolio, employed as a tool to securitize liquid assets (shares, fixed income, or derivatives, to name a few), can have a daily or weekly pricing frequency, depending on the positions held in the ETP.
  2. Accrued Liabilities. It is the cost structure of the fund, basically the management fee, performance fee, and any other operating expenses of the fund. FlexFunds allows portfolio managers to launch an investment plan to the market through ETPs, which may be achieved in less than half the time and at a lower cost than other alternatives in the market. The expenses incurred by the asset manager to be able to distribute his fund will have a direct impact on the Alpha that might be generated and, on the performance obtained by his clients. This is why FlexFunds’ cost-efficient solution represents a competitive advantage.
  3. Shares Outstanding. Total notes issued and held by the investors. In the global notes program context, these can be purchased and sold via Euroclear and Clearstream, facilitating the distribution of the securitized product and enabling their custody in diverse private banking platforms and brokerage accounts.

The objective of an ETP significantly influences not only the composition of its asset portfolio and cost structure but also how often the financial instruments are updated, influencing the NAV update frequency.

FlexFunds securitization program allows portfolio managers to design and launch customized investment vehicles through ETPs. FlexFunds acts as the calculation agent for the net asset value (NAV), distributing it among the principal price disseminators according to the defined frequency set on the management strategy, providing a comprehensive tool to the asset administrator that allows to reduce the operating expenditures.

FlexFunds ensures a smooth and cost-effective securitization process for investment managers seeking to expand and consolidate their fund, regardless of the asset being securitized, the fund’s fees, or the total units to be issued. If you wish to know more about how you can boost the distribution of your investment strategy and expand your available investor market, you can contact our team of experts.

Sources:

  • https://www.investopedia.com/terms/n/nav.asp
  • https://www.investor.gov/introduction-investing/investing-basics/glossary/net-asset-value

Disclaimer:

The purpose of content of the above article, blog, or post is only informational, and it is not intended to provide any sort of investment advice, as an offer of solicitation to buy, sell, or hold, or as recommendation, endorsement of any security, investment, fund and / or company. The content and information provided in the above article, blog, or post does not constitute financial, trading, or investment advice of any type. Neither FlexFunds ETP nor FlexFunds Ltd. is a U.S. registered broker-dealer, or an investment adviser registered with the U.S. Securities and Exchange Commission. Our entities do not raise capital for clients or the Issuers. We do not solicit any specific products, nor offer investment advice or make investment recommendations, nor do we offer tax, legal, financial advice or otherwise. Perform your own due diligence and consult a financial advisor prior to making any investment decision.

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NAV components and its role in investment strategies | FlexFunds (2024)

FAQs

NAV components and its role in investment strategies | FlexFunds? ›

Authored by FlexFunds

FlexFunds
FlexFunds creates and launches independent investment vehicles through an asset securitization program, which designs fund-like listed products (ETPs), facilitating strategy management and global distribution to non-U.S. end-investors.
https://www.flexfunds.com › what-does-flexfunds-do
. The NAV (Net Asset Value) is a critical concept in the investment funds and exchange traded products (ETPs) industries; it represents the intrinsic value per unit of these financial instruments. The distribution of this value offers increased transparency and more information for the participants ...

Why is the NAV important? ›

Importance of NAV

Whether using it for a business or a fund, the NAV is an important metric that reflects the total shareholder (or unitholder) equity position. By dividing the NAV by the number of shares or units outstanding, one can determine the net asset value per share (NAVPS).

What is NAV in finance? ›

"Net asset value," or "NAV," of an investment company is the company's total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investment company's NAV will be $90 million.

What is the NAV cycle? ›

That is the NAV cycle. The NAV is the assets of the fund minus the liabilities of the fund.

What are the components of NAV? ›

The calculation of NAV in mutual fund involves two primary components: the market value of assets and liabilities.
  • Market Value of Assets. The assets of the mutual fund scheme involve two components: ...
  • Liabilities. Operating Expenses: These are costs incurred in managing the mutual fund.
Feb 9, 2024

What is the purpose of NAV? ›

NAV helps determine which investment one might choose to withdraw or keep in their investment portfolio by providing a reference value.

What is a NAV finance? ›

In essence, NAV financing is a credit facility secured against the market value of an investor's holdings in an investment fund. The structure of the loan vehicle recognises the true value of the borrower's assets, making it an attractive proposition for investors with highly diversified and valuable portfolios.

What is the NAV strategic financing strategy? ›

NAV Strategic Financing capitalises on the growth of the private equity fund finance market to provide non-dilutive strategic capital solutions to private equity GPs and funds.

Is a higher or lower NAV better? ›

The notion that a Mutual Fund's performance is inversely related to its NAV is a misconception. NAV is simply the per unit value of the fund and it does not reflect its quality or potential. For example, a fund with an NAV of Rs 22 is not necessarily superior or inferior to one with an NAV of Rs 85.

What are the two types of NAV? ›

More than one type

The first two types of NAV are NAVs including current year income and NAVs excluding current year income.

Who calculates NAV? ›

NAV and per-share NAV are calculated for a mutual fund or unit investment trust. NAV is calculated at the end of each business day using the closing market prices of the portfolio's securities.

What are the factors affecting NAV? ›

A fund's expenses, fees, and taxes influence its NAV. As these costs rise, they reduce the fund's earnings and net assets, thereby impacting its NAV. Expenses such as marketing and distribution fees are usually fixed, while asset-based fees such as management fees rise and fall with the fund's NAV.

What is the benefit of NAV? ›

NAV credit facilities may be a beneficial option for providing a fund with necessary liquidity and/or leverage in instances where a subscription-backed credit facility may not be an option for a fund. Sponsors can also obtain the liquidity necessary to effectively manage the fund and maximize its performance.

Why is NAV important in real estate? ›

NAV is used instead of price-to-book ratios and other book value measures. NAV seeks to figure out the actual value of the REIT's holdings by taking the market value and subtracting any debts, such as mortgage liabilities.

Why should I use NAV? ›

nav is a new element that makes it much easier to create a navigation menu. It creates a neat, horizontal menu of text links, and helps screen reading software to correctly identify the primary navigation areas in a document.

Is it better to have a high or low NAV? ›

The notion that a Mutual Fund's performance is inversely related to its NAV is a misconception. NAV is simply the per unit value of the fund and it does not reflect its quality or potential. For example, a fund with an NAV of Rs 22 is not necessarily superior or inferior to one with an NAV of Rs 85.

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