Assume that an open-end fund has a portfolio worth $525 million, liabilities tot

Question

Assume that an open-end fund has a portfolio worth $525 million, liabilities totaling $25 million, and 20 million shares outstanding. The fund charges an expense ratio of 1.5 percent and 12b-1 fees equal to 0.5%.

A. What is the net asset value (NAV)?

B. Assume that, in a typical year, the fund sells $100 million worth of stock but purchases $110 million. What is the portfolio turnover ratio?

C. Assume that over the previous year, the fund paid dividends (to investors) totaling $5 million, paid out $7.5 million in capital distributions, and earned a return of 3% on its portfolio. What was the rate of return?

Explanation / Answer

Net Asset Value (NAV) = [Assets - Liabilities - Expenses]/(shares outstanding)

The expenses include all accrued expenses including 12b-1 epxenses also.

Assets = $ 525 million

Liabilities = $ 25 million

Expense Ratio = 1% = 5.25 million

12b-1 fees = 0.50% = 2.63 million

Hence Net Assets = $ 492.13 million and NAV = (492.13/20) = $ 24.61

Portfolio turnover ratio is simply the number of times the portfolio has been churned during a year - it is calculated by taking the minimum of either total sales or purchases and dividing it by the average portfolio during the said time period. In this case we assume the Net Assets to be average assets also = $ 492.13 million. Hence portfolio turnover ratio = 100/492.13 = 20.32%

Investor Return = Dividend + Capital Distribution + Fund Return

Dividend = $ 5 million

Capital Distribution = $ 7.5 million

Portfolio Return = 3% (on $ 492.13 million) = $14.76 million

Total Inflow = $ 27.26 milllion

Return =( 27.26/525)= 5.19%

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