Could a "directors’ cut" help ease uncertainty over NAV pricing?

If there is one thing that unsettles the financial markets it is uncertainty. It is difficult enough to decide which shares to buy without investors being denied a reliable clue as to what their underlying assets are actually worth today.

What are the true liabilities of the leading UK banks? Few have any real idea. Mercury Asset Management was offered by Sigmund Warburg around the City for nothing in 1979 and no-one wanted it. But Mercury, spun off and revitalised by its managers, would be sold on for £3.1 billion in 1997.

Within my own sector, uncertainty can hurt share value too. Take the strange case of Fleming American Investment Trust. Out of the blue in 1997, the trust had a law suit slapped on it by the US Environmental Protection Agency (EPA), a body rightly feared for its Rottweiler-like tactics in extracting compensation from industrial companies for their pollution damage inflicted in bygone years.

In Fleming American’s case, it is scarcely credible to report, the damage in question was the contamination of a lake with creosote between the years 1887 and 1891– decades before the trust had even been launched. The premise was tentative at best but the prospect of paying a court full of US lawyers for months on end sent the trust’s share price into tailspin mode. The discount widened out to match.

In the end, the trust’s board decided to put an end to the uncertainly by settling with the EPA – without any admission of liability – to the tune of several million dollars.

The trust’s share price recovered, the discount narrowed back in and the company thrives today as JP Morgan American Investment Trust.    

Why is all this important? Because a similar thing is happening now in two sectors in particular: private equity investment trusts and commercial property income funds.

The plain fact is that the published net asset values (NAVs) per share are – virtually always with good reason – simply not being believed by the market. How did it happen? First because these trusts typically only update their NAVs quarterly, and then several weeks in arrears.

Thus a trust being priced and quoted in the market today will be a citing an NAV dating to several months ago. The next quarterly figure, say to 31 December last year, will not be published until perhaps mid-March. In current market conditions, the next figure is bound to be lower than the last but few know by how much. This lack of transparency is spooking investors and frankly you can see why.

From where I stand it is within the powers of directors to act by introducing what we might catchily call the ‘directors’ cut’ to quoted NAVs. A plain language assessment or footnote, perhaps added to the monthly fact sheet or the interim report, might do the trick.