Dividends, short-term capital gains, and long-term capital gains are payable liabilities by law in the United States for investment fund companies. With regard to corporate issuer equities like IBM and Apple, if there is a reasonable expectation that a dividend will be paid in the future, it should be accrued as a liability. This is the essence of accrual accounting.
Yet, these distributions are not recognized as liabilities until the ex-dividend day, which is the first day of the next payment period. On the ex-dividend day, the security value will fall by an amount equal to the distribution paid. This drop results from the security finally recognizing the distribution correctly – as a liability, not an asset. The process of not recognizing distributions as payable liabilities inflates a security’s value and causes investors to purchase fewer shares.
An investment fund trading at $100 per share that will pay a $10 capital gain and a $2 dividend is not worth $100 – it is worth $88. Therefore, financial services firms must revisit the generally accepted definition of “net asset value” or “NAV” because investors believe the NAV is derived by subtracting all fund liabilities from all fund assets.
Therefore, every single income-producing security in our stock market is trading at an inflated value, causing you to purchase fewer shares and earn fewer dividends. This is a huge problem for investors.
But as you can see, not all of a fund’s liabilities are considered in NAV calculations. In fact, the largest and most important liabilities of an investment fund, the distributions, are totally left out of the NAV calculation. The term NAV, as we know it, is misleading and should be amended to ensure accuracy. Without clarity, investors could claim that they are being billed on fund liabilities, which is prohibited in a fund’s prospectus.
FairShares believes securities should be priced fairly and has a product that will fix the valuation of investment funds. Unfortunately, financial services firms enjoy inflated security values because it benefits them.