Accumulation funds confusion

homerhotspur

Despite reading several articles explaining how acc funds work, I have never really satisfactorily been able to understand how they are performing year on year. I still believe that the principle of 'compound interest' is best for my circumstances but do wish I could see how it all fits together(in an ISA , so no statements of interest/dividends received).

I recently checked one of my bond funds performance for the last 12 months and found that the 'yield' or interest paid was identical for acc and inc versions and, on the overall performance chart, the income version had actually performed very slightly better than the acc version.

In my mind , I would have expected the opposite and that , over a longer period, of say 5 years, the acc version should perform noticeably better because of the effect of re-invested income?

Linton

I believe performance statistics for INC funds assume reinvested dividends/interest. If you tell us which fund it is, including the class letter, we can have a look at the data.

homerhotspur

The one I looked at was

M&G Corporate Bond Class I - Accumulation

xylophone

I don't quite understand the problem?

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/m-and-g-corporate-bond-class-i-accumulation

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/m-and-g-corporate-bond-class-i-income

Compare the price of an Acc unit with that of an Inc unit......

And dividends..

http://www.trustnet.com/Factsheets/tnuk/FactSheet.aspx?fundCode=MGSHI&univ=U&typeCode=FABF4&pagetype=dividends

http://www.trustnet.com/Factsheets/tnuk/FactSheet.aspx?fundCode=MGSHI&univ=U&typeCode=FABF5&pagetype=dividends

MrStanners

I also thought I understood the difference between acc and inc funds but now I'm confused.
I compared the price of the Acc unit in the link (65.12p) with the Inc unit (39.58p).
I don't understand how this explains the difference, it just tells me I can buy a lot more Inc units compared to Acc units.
Why are they different prices?
BTW the dividend links didn't work for me.

masonic

MrStanners wrote: »

Why are they different prices?

Because the price of one set of units includes accumulated income and the other doesn't. The number of units you own is irrelevant anyway. 1000 units priced at £1 with a yield of 3% are worth the same as 100 units priced at £10 with a yield of 3%.

Aretnap

homerhotspur wrote: »

I recently checked one of my bond funds performance for the last 12 months and found that the 'yield' or interest paid was identical for acc and inc versions and, on the overall performance chart, the income version had actually performed very slightly better than the acc version.

In my mind , I would have expected the opposite and that , over a longer period, of say 5 years, the acc version should perform noticeably better because of the effect of re-invested income?

As above, with inc funds the performance data assumes that you use the dividend income from the fund to buy more units. It shows you the effect of compounding and provides a fair comparison between different types of funds. So in theory there should be no difference between the performance of the inc and acc versions of the same fund.

In practice there are differences between the way the two types of fund work which could result in slight differences. One that springs to mind is that the shares the fund holds will pay dividends on many different dates throughout the year. The acc fund will reinvest them immediately, the inc fund will hold them as cash until it's time to pay out its own dividend (six monthly, quarterly or whatever). So if you hold inc units a slightly greater proportion of your money is sitting as cash rather than as the fund's underlying assets - which could be a good thing or a bad thing depending on the performance of the underlying assets. Also the acc fund may incur extra dealing costs by reinvesting dividends, which may act as a slight drag on its performance. The inc fund won't incur those costs - though of course you may incur your own dealing costs (which will not be reflected in the performance figures) when you reinvest your dividends manually. Any differences will be rather small - probably too small to be worth spending much time worrying about.

Aretnap

MrStanners wrote: »

I also thought I understood the difference between acc and inc funds but now I'm confused.
I compared the price of the Acc unit in the link (65.12p) with the Inc unit (39.58p).
I don't understand how this explains the difference, it just tells me I can buy a lot more Inc units compared to Acc units.
Why are they different prices?
BTW the dividend links didn't work for me.

The units are (probably) the same price when the find is launched, and each unit represents a certain number of shares (or bonds, or whatever it is that the fund invests in).

Now as the shares produce dividends the inc units pay them out to someone's bank account, while the acc units use them to buy more shares. So over time the number of shares represented by an acc unit increases - the number represented by an inc unit stays the same.

So if you buy into the fund today, if you buy an acc unit you are effectively buying more shares than if you buy an inc unit. This is reflected in the higher price per unit.

homerhotspur

Some interesting replies/info thanks.

So, it seems that the main point is that the performance charts are, more or less, the same and not, as I thought, any indication of the accumulation of re-invested income. I suppose, that being the case, the best measure is to compare the selling price compared to your purchase price for an idea of peformance over the entire period of ownership. You could also do this annually for a 12 month performance figure?

masonic

homerhotspur wrote: »

So, it seems that the main point is that the performance charts are, more or less, the same and not, as I thought, any indication of the accumulation of re-invested income. I suppose, that being the case, the best measure is to compare the selling price compared to your purchase price for an idea of peformance over the entire period of ownership. You could also do this annually for a 12 month performance figure?

They (acc vs. inc) are more or less the same because the charting tools are taking into account the accumulation of re-invested income. Comparing selling price (or current price) to purchase price, while not taking into account income, would be a deeply flawed way to measure performance.

It is that sort of thinking that has led to the misconception that someone who invested in the FTSE 100 at the start of 2000 is currently sitting on a loss.

homerhotspur

although the dividends link didn't work for me either, I found the info and noted that the dividends paid out on the acc version were higher then the inc version. I am now trying to get my head around this point!