Accumulation Shares and Ex-Dividend Dates

BettySpofkins

Hi, maybe somebody smarter than me could help explain something, or correct my understanding...

With accumulation units in funds, dividends are not paid out in cash, but are rolled into the share price. Thus on dividend day, a shareholder should see an uplift in the price of their holding over and above market movements.

To benefit from this uplift, one must hold the shares on the ex-dividend date, let's say a couple of months earlier.

So if I hold a share on the ex-dividend date, and you buy a share after that date, my share should increase in value when the dividend is paid, but yours should not.

But here's the rub: shares in funds just have the one price! It's quoted on the fund manager's web page. There's no "me price" and "you price"!

What gives? What's to stop people just buying the day before dividends are paid and selling the day after? What subtlety am I missing here?

grey_gym_sock

i'm not quite clear if you're talking about shares or funds. both have ex-dividend dates. but only funds have accumulation units (as opposed to income units).

for a share, or an income unit in a fund, the last day to buy the share/fund in order to get the dividend is the day before the ex-dividend date. on the ex-dividend date itself, the prices drops (other things being equal). on the dividend day, nothing happens to the price of the shares/units (otbe), and the dividend is paid to whoever owned the shares on the relevant date (even if they've sold them since).

when a fund has both income and accumulation units, they do have 2 different prices, and the accumulation units gradually pull ahead of the income units. (or presumably they jump ahead on each ex-dividend date, but i haven't watched the daily price moves to check.)

but basically, there is no ex-dividend date for accumulation units, the price just gradually increases (otbe) due to the dividends received. it's income units or shares that have sudden jumps - a price drop on the ex-dividend date, and a similar amount of cash paid out as a dividend some weeks later.

dtsazza

BettySpofkins wrote: »

What gives? What's to stop people just buying the day before dividends are paid and selling the day after? What subtlety am I missing here?

What stops that happening, is the thing itself.

Imagine if it did happen - the price jumped by say 5% on the ex-date. Then since these dates are known in advance, everyone would just buy on the day before and sell afterwards for effectively risk-free profit.

Because of this it might be hard to get hold of at the given price. And people would be willing to buy for even 4.5% higher and then sell for a 0.5% profit. Even then, depending on trading costs (which are minimal for large players), buying and selling for a 0.05% profit is still very profitable given its guaranteed nature.

So the short answer is "markets". Because everybody knows it's going to be worth x tomorrow, it's worth x today.

As grey gym sock says, the value of the dividend tends to accumulate in the price over time, in a very shallow slope. This is partly because of uncertainty over what dividend will actually be paid (until it's confirmed), and partly because of opportunity cost
(having the money tied up for 3 months to get the dividend gives a lower rate of return than having it tied up for 1 week).

xylophone

there is no ex-dividend date for accumulation units,

I don't understand? Example http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=GTF91&univ=U&pagetype=dividends
http://www.incademy.com/courses/Unit-trusts-and-OEICs/Capital-Gains-Tax/16/1007/10002

grey_gym_sock

oh, i see what you mean ... yes, there must be an ex-dividend date for tax purposes ... i suppose i forgot about that because i was assuming that you wouldn't buy accumulation units except in an ISA or pension, because they'd be too much trouble if you have to work out the tax.

BettySpofkins

Thanks, GGS. I appreciate that my interchanging of terms was unhelpful, but you figured out exactly what I meant!

dtsazza - I see what you're driving at, but the majority of these funds (in the UK at least) are open-ended rather than exchange-traded, so premiums/discounts can't possibly be arbitraged away like that.

It's beginning to make sense, though I'm still puzzled why people don't trade in and out overnight. Maybe the amounts involved simply aren't large enough to justify the faffing or the risk.

Thrugelmir

BettySpofkins wrote: »

It's beginning to make sense, though I'm still puzzled why people don't trade in and out overnight. Maybe the amounts involved simply aren't large enough to justify the faffing or the risk.

Better to buy ex-div then sell c u m -div. Then the gain is treated as capital not income.

BettySpofkins

I'll take your word for that, but I assume most retail investors buy these funds through an ISA or SIPP, meaning that's not an issue?

sabretoothtigger

Retail investors dont usually drive prices. Pension fund managers are bigger players among others.

I always see fund price go down ex personally. Shares not always especially with lots of news

What stops that happening, is the thing itself.

If we had acknowledgement of that more, the market would be very different now
http://en.wikipedia.org/wiki/LCTM#Aftermath
We stop the stop thing in the hope we have stopped things ever starting to stop

BettySpofkins

Errrr...ok, well that's cleared that up then.

sabretoothtigger

The simple take is if there is a price difference, assume its for a good reason.

If it was that easy people would be doing it and they probably already are partly with varying sucess

LCTM was about the same thing pretty much I think, gaps in the market. Super clever guys, tons of maths all about collecting the easy money out there. Except the prices were like that because of risk, they spent billions, lost alot of money got bailed out.
Couple years later they did it again and failed again because they ignored the lesson that only money risked can profit

What's to stop people just buying the day before dividends are paid and selling the day after?

Nothing, its easy and you can lose all your money too

This whole subject is basically the center of world finance, get this and its the key to everything I reckon. Risk and profit is what governments try to destroy
http://en.wikipedia.org/wiki/Arbitrage

ISA or SIPP

Still taxed I believe. Stamp and also dividends are taxed as well as the company itself of course doing taxes, vat, etc