Pasternak's Normalized Net Asset Value

Written By
Paul Tracy
Updated July 7, 2021

What is Pasternak's Normalized Net Asset Value?

Pasternak's normalized net asset value (NNAV) allows investors to compare master limited partnership (MLP) funds with each other and with non-MLP closed-end funds.

How Does Pasternak's Normalized Net Asset Value Work?

Pasternak's NNAV was created by Carla Pasternak, an income-investing expert at 

Pasternak's NNAV is calculated according to the following formula:

Pasternak's NNAV = Net Asset Value + Deferred Tax Liability

Investing in MLPs can be incredibly complicated, especially around tax time. So many investors choose to sidestep the tax implications of investing in MLPs by investing in MLP-focused closed-end funds

MLPs tend to make "return of capital" payments to their unitholders. [Click here for a full explanation of return of capital.]

MLP funds are not taxed on the "return of capital" they receive from MLPs until they actually sell the MLP units (the same is true for individual investors). Taxes on this "return of capital" portion are deferred until the security is sold. The MLP fund accounts for these accrued taxes by creating an accounting line item called "deferred tax liability (DTL)." 

As the name implies, DTL is on the liability side of the books, along with other long-term debt obligations. You can find DTL on the MLP fund's balance sheet, or "statement of assets and liabilities."

Essentially, the MLP fund uses the DTL line item to show that it may have to pay taxes eventually, but it doesn't have to pay them right now.

In that way, DTL isn't a liability in the same sense as traditional debts. The DTL "bill" only comes due if and when the fund sells its MLP units. In theory, if an MLP fund never sells its units, it will never have to pay the DTL. Therefore, funds with very low portfolio turnover rates -- say, less than 25% of its holdings each year -- will never sell enough of their holdings to trigger large tax bills. The taxes will stay deferred instead of becoming due and payable.

Consider: A debt that never has to be repaid doesn't really exist. Pasternak's NNAV takes this into account by adding DTL to NAV to give a more accurate picture of a fund's assets. Then, by comparing the fund's NNAV to its price, you can see if it's trading at a premium or a discount. 

For example, Lo-Turnover MLP Fund may be trading at a premium to NAV of +10%. But, by calculating Pasternak's NNAV, you may find that it actually trades at a discount to NNAV of -5%. 

Why Does Pasternak's Normalized Net Asset Value Matter?

Pasternak's NNAV allows investors to make apples-to-apples comparisons among MLP-focused closed-end funds and regular closed-end funds.

This is incredibly important for investors who would rather hold MLP funds instead of individual MLP units in their retirement accounts. MLP-focused funds let you own as many MLPs as you want in your tax-sheltered account without triggering complicated IRS rules and creating a potential tax nightmare.

By using Pasternak's NNAV, investors can adjust the price/NAV calculation to account for the added benefit of DTL. Funds that may appear to be selling at a steep premium to their asset value may actually be attractively valued.

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