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  • FIRST POST
    • aroominyork
    • By aroominyork 12th Aug 17, 9:07 PM
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    aroominyork
    Payment of dividend on accumulation funds
    • #1
    • 12th Aug 17, 9:07 PM
    Payment of dividend on accumulation funds 12th Aug 17 at 9:07 PM
    A simple question, I think. Does the price of an accumulation fund go up on the day a dividend is paid, by the same amount as the yield (and of course by any other fund movement that day)?
Page 1
    • bowlhead99
    • By bowlhead99 12th Aug 17, 9:23 PM
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    bowlhead99
    • #2
    • 12th Aug 17, 9:23 PM
    • #2
    • 12th Aug 17, 9:23 PM
    A simple question, I think. Does the price of an accumulation fund go up on the day a dividend is paid, by the same amount as the yield (and of course by any other fund movement that day)?
    Originally posted by aroominyork
    No.

    Over the year, the fund gets dividends or other income from its underlying investments so the asset value of the fund ticks up gradually over the year as the fund gets more cash.

    The price of the income class of a fund goes DOWN at the fixed annual / semiannual / quarterly / monthly points when dividends are going to be paid out to the investors, because from that point the money officially belongs to the investors and not the fund; the fund has fewer assets and the investor will be paid some cash into their own hands.

    The price of an accumulation fund STAYS the SAME when it reaches the relevant dividend date because the investors, by choosing that class, have explicitly said they don't want the dividends to be paid to them, they want the money to stay with the fund ; so the fund doesn't decline in value and can keep hold of all the cash to reinvest it.

    So, by comparison with the Inc class, the Acc class will appear to get more expensive / more valuable on the ex-div date, but really that is just by the fact that Acc doesn't drop when Inc does.

    Acc does not magically get more valuable when it declares a dividend. Units of the Acc class, like units of the Inc class, have been gradually getting more valuable over the course of the year as it actually earns the income. The ex-div date is simply the date it officially decides to pay it out (Inc) or reinvest it (Acc); investors with £1000-worth of shares at that point will still end up with the same total £1000 value (plus or minus that day's normal market movements) whether they are holding the Acc shares or were instead holding Inc shares and then end up with less-valuable Inc shares and some cash in their hand after the div date.
    Last edited by bowlhead99; 12-08-2017 at 9:26 PM.
    • aroominyork
    • By aroominyork 13th Aug 17, 9:50 AM
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    aroominyork
    • #3
    • 13th Aug 17, 9:50 AM
    • #3
    • 13th Aug 17, 9:50 AM
    Thanks bowlhead. Two questions. First, if the owner of an Income fund sold out between the ex-div date and the date the dividend is paid, does s/he receive the dividend? Second, just to be clear, does it make any difference at all whether you buy an Accumulation fund the day before or the day after it goes ex-div?
    • bigadaj
    • By bigadaj 13th Aug 17, 10:17 AM
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    bigadaj
    • #4
    • 13th Aug 17, 10:17 AM
    • #4
    • 13th Aug 17, 10:17 AM
    Answer to first question is yes, which is why the price of a share, or fund, will generally dip at the ex div date rather than the payment date.

    No, to the second, it's included within the price throughout the year, which is why you won't see any dramatic jumps.

    Markets are usually fairly efficient, certainly for known events such as dividend payments, so in most instances these variations come out in the wash.
    • Audaxer
    • By Audaxer 13th Aug 17, 3:17 PM
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    Audaxer
    • #5
    • 13th Aug 17, 3:17 PM
    • #5
    • 13th Aug 17, 3:17 PM
    Second, just to be clear, does it make any difference at all whether you buy an Accumulation fund the day before or the day after it goes ex-div?
    Originally posted by aroominyork
    No as regards an Accumulation fund. However as far as I know if you bought an Income fund the day after the ex-div date, although you wouldn't get the subsequent dividend, the price of the fund would be reduced accordingly (after allowing for normal market fluctuations) as the money for dividend payments will have been put aside.
    • jm78
    • By jm78 8th Sep 17, 2:01 PM
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    jm78
    • #6
    • 8th Sep 17, 2:01 PM
    • #6
    • 8th Sep 17, 2:01 PM
    Do bond accumulation funds work in the same way?

    I have a high-yield corporate bond fund which I held before the ex-dividend date, and the payment date was 31 August. I was expecting (it seems naively) the value of my holding in the fund to go up around 4% (the stated distribution yield) on or soon after the 31st. However, there has been no such increase.

    From reading the very helpful discussion above in this thread, I am now assuming the following:

    - Had I had the income version of the fund, the value of my holding would have fallen by around 4%, and I would now have 4% cash sitting in my income account
    - With the accumulation version, you don't see any rise in your fund value from distribution yield, but you don't lose the equivalent value either.

    Am I right, or still in the dark?
    • Audaxer
    • By Audaxer 8th Sep 17, 2:16 PM
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    Audaxer
    • #7
    • 8th Sep 17, 2:16 PM
    • #7
    • 8th Sep 17, 2:16 PM
    - Had I had the income version of the fund, the value of my holding would have fallen by around 4%, and I would now have 4% cash sitting in my income account
    - With the accumulation version, you don't see any rise in your fund value from distribution yield, but you don't lose the equivalent value either.

    Am I right, or still in the dark?
    Originally posted by jm78
    I think you are right assuming the dividend is an annual one for the whole 4%. If you had an income fund valued at £1,000, it would be reduced by £40 on the ex-div date to pay you the £40 cash on dividend payment date. If you had £1,000 in an Accumulation fund it would remain as £1,000 as they are not taking anything out to pay a dividend. Of course these fund values would also be subject to normal market flucuations on ex-div day like any other business day.
    • jm78
    • By jm78 8th Sep 17, 5:59 PM
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    jm78
    • #8
    • 8th Sep 17, 5:59 PM
    • #8
    • 8th Sep 17, 5:59 PM
    Thanks, Audaxer, that makes sense.

    But ... I have another bond fund, this time the income version, and I haven't noticed any substantial drop in the value of my holding after ex-div dates. Is it possible then that sometimes you make better returns from the income version of a fund than from the accumulation?
    Last edited by jm78; 08-09-2017 at 6:07 PM.
    • Audaxer
    • By Audaxer 8th Sep 17, 6:45 PM
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    Audaxer
    • #9
    • 8th Sep 17, 6:45 PM
    • #9
    • 8th Sep 17, 6:45 PM
    Thanks, Audaxer, that makes sense.

    But ... I have another bond fund, this time the income version, and I haven't noticed any substantial drop in the value of my holding after ex-div dates. Is it possible then that sometimes you make better returns from the income version of a fund than from the accumulation?
    Originally posted by jm78
    I think both versions would have approximately the same returns if you reinvested the Inc dividends. I prefer Inc funds as you can see the dividends earned and have the option of taking the income or reinvesting them if you wish.
    • aroominyork
    • By aroominyork 25th Nov 17, 1:24 PM
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    aroominyork
    Why do a minority of funds only offer an Income version? It is inconvenient for investors who want dividends to accumulate within the fund, and from a business perspective surely it reduces the value of assets held by the fund and hence its profit.
    • bowlhead99
    • By bowlhead99 25th Nov 17, 4:06 PM
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    bowlhead99
    A collective investment scheme that distributes all its received income (net of costs) to its investors is the simplest / purest way of acting as a conduit between the investors and the underlying assets.

    Remember that a lot of the money being invested is not by someone like you who wants to reinvest their income, but by institutions such as insurance companies and pension funds deploying millions of pounds at a time into these funds, who do want an income - either because they are paying it out to their own customers / policyholders, or because they will use the returned cash to rebalance across their portfolio.

    If the investors don't want the income they can reinvest their income into the fund or into whatever else they like.

    If there's sufficient investor demand, they will create an Acc version. However that's perhaps less likely if the fund strategy is to invest in highly income-generative assets, like bonds. Also a problem with an Acc fund if you are an individual or corporation investing unwrapped (not through an ISA or pension) is that it can be annoying to get 'dry income' i.e. you're allocated a load of interest that you have to pay tax on but you're not physically sent any cash to help you pay that tax.

    and from a business perspective surely it reduces the value of assets held by the fund and hence its profit.
    Assuming the same mix of underlying investment holdings, the percentage return on the fund's starting assets will be exactly the same whether it has a lot of assets or slightly fewer assets as a result of paying out the dividends. The majority of costs (management fees, custodian fees, admin fees) are on a percentage basis so the economies of scale from having the fund be 10% larger do not make much practical difference to an investor.

    What makes a difference to the investor is whether they offer a series of the fund shares in a format that the investor wants (currency, inc vs acc etc) - so if there is sufficient demand for it to appear worthwhile to create an extra share class, they will do it (subject to practical regulatory / tax issues or whatever).
    • dunstonh
    • By dunstonh 25th Nov 17, 6:22 PM
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    dunstonh
    Why do a minority of funds only offer an Income version
    Is it a minority? I would say most issue an income share class.

    However, where it isnt, it tends to be on low/no yielding investments were an income share class is largely pointless.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • ffacoffipawb
    • By ffacoffipawb 25th Nov 17, 8:31 PM
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    ffacoffipawb
    Is it a minority? I would say most issue an income share class.

    However, where it isnt, it tends to be on low/no yielding investments were an income share class is largely pointless.
    Originally posted by dunstonh
    I think he was commenting on the lack of availability of Accumulation units (which he wants / prefers) and not Income units.
    • Tom99
    • By Tom99 25th Nov 17, 10:23 PM
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    Tom99
    I am not sure how bond funds work but individual corp bonds are different to shares. They are priced exclusive of the accrued div so if you buy you pay the bond price plus the accrued dive from the last div date and if you sell you get the bond price plus the accrued div.
    • aroominyork
    • By aroominyork 25th Nov 17, 11:33 PM
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    aroominyork
    I think he was commenting on the lack of availability of Accumulation units (which he wants / prefers) and not Income units.
    Originally posted by ffacoffipawb
    Yes, that's right. The fund that made me raise the issue is Baring Europe Select. Bowlhead answered the question helpfully, though it still seems curious that this £2bn equity fund that pays dividends under 1% doesn't offer an Accumulation fund.
    • bigadaj
    • By bigadaj 26th Nov 17, 8:15 AM
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    bigadaj
    I am not sure how bond funds work but individual corp bonds are different to shares. They are priced exclusive of the accrued div so if you buy you pay the bond price plus the accrued dive from the last div date and if you sell you get the bond price plus the accrued div.
    Originally posted by Tom99
    Bonds don't pay a dividend.
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