Why your fund price can fall while NAV rises

What NAV and the share price measure#

NAV is the value of a fund's assets after subtracting its liabilities. Divide that amount by the number of shares outstanding to get NAV per share. SEC definition of NAV.

The market price is what the shares trade for on the exchange. US publicly traded closed-end funds can trade above or below NAV. The UK's investment trusts also have a share price that can differ from NAV. Shareholders selling through the market receive the available market price, which need not equal the assets per share. SEC closed-end fund bulletin. Baillie Gifford Japan Trust's NAV and discount definitions filed with the FCA.

A price below NAV is a discount. With NAV of $10 and a share price of $9.50, the discount is 5%: the $0.50 gap divided by $10.

How rising NAV can leave you with a loss#

Imagine you hold 100 shares throughout a period with no cash distributions.

At the start, the shares trade at 95% of $10, giving a $9.50 price. At the end, they trade at 80% of $11, giving an $8.80 price.

NAV per share rose 10%. Your holding's market value fell $70, or 7.37%. The discount widened enough to turn asset growth into a share-price loss.

You still own 100 shares. The difference comes from the price the market puts on each one. A shareholder selling at the ending price would receive $880 before costs, despite the assets per share having risen.

Include the cash you received#

A price chart leaves out cash paid to you unless it explicitly shows a return measure that includes distributions.

For a separate example, suppose you paid $950 for a holding, received $50 in cash distributions and ended with shares worth $930. Your combined value is $980. The gain is $30, or 3.16%, before tax and trading costs, with no further purchases or sales.

The price-only result is a $20 loss. The difference is the $50 that moved into your cash balance.

If you reinvested that cash, use the resulting shares in your ending holding value. Adding the same $50 again would count it twice. A fund's published total-return figure may assume reinvestment, so check its method before comparing it with your account.

Also read the distribution notice. A closed-end fund's payment can include investment income, capital gains or a return of capital. The cash amount alone does not show how much the fund earned. A return of capital gives you back part of the invested principal and reduces the assets left in the fund. SEC closed-end fund bulletin.

Reconcile the figures in your account#

Put the starting and ending market prices beside NAV per share for the same dates. Check the share class and currency too. A current quote beside an older NAV can create an apparent gap between figures measured at different times.

Then list the distributions and any extra purchases or sales. For an unchanged holding, you can separate the result into the change in NAV per share, the change in the discount or premium, and the cash received.

Those entries tell you where the difference arose. To understand the risk still in the holding, read what the fund owns and how it finances those assets.

How borrowing changes the NAV movement#

A fund can borrow to hold more investments than shareholders' money alone would buy. The investments change in value while the borrowing still has to be repaid. That can magnify the change in the net assets belonging to shareholders. SEC closed-end fund bulletin.

In a hypothetical fund, $100 of investments are financed by $80 of shareholders' net assets and $20 of debt. Assume no other liabilities, distributions, interest or fees, and an unchanged share count. If the investments rise 10% to $110 and debt stays at $20, net assets rise to $90. That is a 12.5% gain on the starting $80. If the investments instead fall 10% to $90, net assets fall to $70, a 12.5% loss.

Borrowing costs and fund expenses reduce the amount left for shareholders too. Check the actual borrowing terms and expense disclosures. This example isolates borrowing; derivatives and other arrangements can create different exposures, and the share-price discount can still change separately from NAV. Filed definitions of gearing and leverage.

What a discount tells you#

A discount tells you how far the share price sits below the reported NAV. It does not establish that the discount will close or that NAV will hold up. You could sell at a wider discount later, even if the fund's assets perform well.

The useful question is what explains that gap for this fund. Keep the asset record, borrowing and distribution policy alongside the discount. A lower market price changes what you pay for exposure to those assets; it also leaves you exposed to what happens to them.