Listed Equity Fund prices underperforming despite recovery in NAVsWednesday, September 22, 2021
BY DURRANT PATE
THE economic turbulence triggered by the novel coronavirus pandemic has weighed on the performance of locally listed closed-ended funds (CEF), which have been among the most severely affected equities on the Jamaica Stock Exchange (JSE).
NCB Capital Market has assessed that, “the decline has caused a fall-off in the price of CEFs such as QWI Investments Limited (QWI), Mayberry Jamaican Equities (MJE) and Sagicor Select Financial Limited (SELECTF), which invest in stocks listed on the JSE. Only QWI has equity holdings overseas but its Jamaican holding represents 73% of its total portfolio”.
Stock markets locally and abroad have recovered some ground this year, with both the JSE Main and Junior Market indices grown by 3.5% and 24.2%, respectively year to date and the rebound translating into a marked improvement in the net asset values (NAVs) of these equity CEFs. The net asset value of a company is the company's total assets minus it liabilities. When this is divided by the number of shares we get a per share value/unit price of the NAV at a specified time.
The three funds mentioned above now trade at significant discounts to their NAV, with the discounted range being between 22%-38%. Year to date, the stock price for QWI and MJL have increased but not as much as their NAV while for SELECTF, both its NAV and the stock price have declined.
Of note is the fact that the stock price has declined at a much faster pace. To assess a fund, its stock price should be reviewed in conjunction with its NAV, which reflects the true value of the fund to investors. Therefore, in a perfect scenario, a fund's stock price and NAV per share should be the same.
In its weekly market guide, NCB Capital Markets reports that the NAV of both QWI and MJE have been appreciating year to date but their stock prices are at discounts of 38% and 29%, respectively while for SELECTF, the stock is trading at a discount of 31% to its NAV.
The brokerage and wealth management arm of the NCB Financial Group sought to explain the reasons these stocks trade at such significant discounts noting that, “perhaps the answer lies in poor investor sentiment and the level of uncertainty in the financial markets at this time, which may cast doubt on fund managers' ability to sustain their current portfolio performances. Investors may still be cognisant of the risks that could materialise”.
Consequently, despite the improved NAV performance, investors may still be hesitant to increase their exposure to these funds. The result is that demand remains weak despite the significant value that appears to be on the table, given the huge discount at which the stock trades relative to the NAV.
Given the uncertainties in the market, it is believed that CEF stock prices could continue to trade at a discount to NAV for some time, highlighting the lingering effect of the pandemic on the financial markets.