net asset value per share (nav)

Case Study

Net asset value, the Holy Grail for mutual fund investors, isn't always what it indicates. A mutual fund's shares are issued and redeemed at a price based on the fund's net asset value. Net asset value, in turn, is based on the value of securities held in a fund's portfolio. A mutual fund with 100,000 shares outstanding and holding a portfolio valued at $1 million has a net asset value of $10. An accurate net asset value depends on an accurate valuation of assets in the portfolio. Valuation isn't a problem when a mutual fund owns large publicly traded securities. Valuation can be a problem when a mutual fund holds securities that are seldom traded. In 2000 two high-yield municipal bond funds operated by Heartland Advisors, Inc., of Minneapolis slumped in value when the funds reduced the values at which bonds were being carried in the two funds' portfolios. The one-day declines amounted to a mind-boggling 77% for one fund and 44% for the other fund. During the next month the two funds increased in value by 24% and 7%, respectively, after Heartland directors assumed the responsibility of pricing the funds' bonds, which had earlier been priced by an independent firm. Accurate pricing of securities can be particularly difficult in cases in which liquidity is limited, as is the case with many small issues of nonrated debt. Heartland fund shareholders filed numerous federal lawsuits alleging that the funds were carrying the bonds at inflated values.