The premium or discount of the market price to the net asset value (NAV) as of the most recently available date (listed in the column heading), expressed as a percentage of the NAV.
Benefits
Provides an up-to-date picture of a fund's selling status. A negative number indicates that the fund's shares sold at a discount to NAV, and a positive number indicates the shares sold at a premium.
Origin
Morningstar calculates these figures using NAVs provided by the fund companies.
Example
If the number shown is –10.00, for example, the shares sold at a 10% discount to NAV on the date listed.
For the Pros
The formula for calculating premiums and discounts is:
(Market Price/NAV - 1) x 100
Share Prices
Many fund managers take great pains to prevent their funds' shares from trading at deep discounts or nose-diving at the first sign of bad news. Some funds have even come to market promising annual tender offers at NAV. Other funds buy back their shares in the open market when their prices dip. Still other funds have steady payout policies that distribute anywhere from 7% to 12% of total returns per year. Such plans theoretically support the share price by assuring some level of cash return at net asset value (NAV).
It's important for funds to support their share prices, but not at the risk of long-term performance. Funds that consistently pay out more than they earn end up eroding their asset bases, which are crucial to future returns.