'Acc' funds vs 'Inc funds with dividends reinvested'

BeansOnToast_2

Another Con for Income funds with dividends re-invested.

I had such a fund in my ISA which has monthly dividends. I recently switched out of the fund entirely. 3 weeks later I received a monthly dividend of £11.71, which were automatically re-invested in the fund. So I found myself with a very small investment in the fund I'd switched out of. I immediately sold these extra units. Then a month later I received another dividend of £0.04 and I got yet more units.

Good job my platform has no dealing fees, but it was a bit of a hassle.!

redux

Does anyone know if Acc and Inc units are counted as the same or distinct funds for capital gains purposes?

In other words, could someone wanting to realise a gain to use up part of the annual exemption allowance do this by selling one type and switch immediately into the other?

Dird

I think this is a big swindle. Isn't the point of Acc for it to be re-invested? Where is the proof this even happens? I imagine re-invest = buy more units.

However, looking at my holdings that are in profit (only 2!) the Price has increased but the Quantity has not. For all I know this price increase is 100% the underlying share prices naturally increasing with the fund managers pocketing the dividends

Eco_Miser

Dird wrote: »

I think this is a big swindle. Isn't the point of Acc for it to be re-invested? Where is the proof this even happens? I imagine re-invest = buy more units.

However, looking at my holdings that are in profit (only 2!) the Price has increased but the Quantity has not. For all I know this price increase is 100% the underlying share prices naturally increasing with the fund managers pocketing the dividends

And for all I know there are no underlying shares, with Bernie Madoff pocketing the whole lot.
There are systems in place to stop this happening.
You can look at the inc shares to see how the underlying share prices have changed, and somewhere you will have a notification of what the dividends are, and when they were added to the acc shares.

zolablue25

Dird wrote: »

I think this is a big swindle. Isn't the point of Acc for it to be re-invested? Where is the proof this even happens? I imagine re-invest = buy more units.

However, looking at my holdings that are in profit (only 2!) the Price has increased but the Quantity has not. For all I know this price increase is 100% the underlying share prices naturally increasing with the fund managers pocketing the dividends

If you really think this then maybe you should sell your units.

bowlhead99

Dird wrote: »

I think this is a big swindle. Isn't the point of Acc for it to be re-invested? Where is the proof this even happens? I imagine re-invest = buy more units.

Well, you imagine wrong.
Surely you are just trolling here. The process has been fully explained above. If you take money out of the fund via a dividend and put it in your own hand (income units) then the value of what's left in the fund will fall, and you can see this by a fall in price of the Inc units versus the Acc units on ex-dividend day. Once this had happened you would need to manually re-invest by spending the money that's in your hand, to buy more units.

If you never take money out of the fund via dividend then the money never left the fund and doesn't need to be manually reinvested. The money in the fund's bank account that would have been spent on paying dividend to investors (in an Inc fund) is simply spent on new investments (in an Acc fund).

In the Inc fund they won't have any money in the fund bank account to buy any new investments, because they just gave it to the investors. So there won't be any new investments in the Inc fund other than from spending what comes in through the door as new subscriptions (existing investors subscribing for new units or new investors subscribing for new units).

However, looking at my holdings that are in profit (only 2!) the Price has increased but the Quantity has not.

Of course the quantity has not. Why would you need to get any more units? You don't have any money to buy any new units. The old units didn't decline in value from paying out money as dividends, so there is no reason you should need to have more of them to maintain your position.

By contrast, in the Inc fund, the units would have declined in value and so you would need to hold more units to maintain the total value of what's invested.

For all I know this price increase is 100% the underlying share prices naturally increasing with the fund managers pocketing the dividends

So how would you explain the Acc funds being relatively more valuable than the Inc funds by the exact amount of the dividend every time there's a dividend?

By your logic the manager must be plundering equally from the Inc funds assets too, if the Inc fund assets are paying to their investors and the Acc fund assets are paying to the manager's back pocket and there is still a gap opening up between the two values equivalent to the dividend paid out to the Inc investors.

If you suspect that level of subterfuge and impropriety, you might be better off giving up investing in financial products and go and live off the land as a hippie on a hillside where nobody can plunder your financial instruments because you don't have any, man.

Dird

bowlhead99 wrote: »

If you take money out of the fund via a dividend and put it in your own hand (income units) then the value of what's left in the fund will fall

Why would it? Today my price is £15, Tomorrow those companies pay £2 worth of dividends; if I take it as cash the fund should be worth £15 still while I have £2 cash.

bowlhead99 wrote: »

Why would you need to get any more units? You don't have any money to buy any new units.

To make it clear what % rise in your portfolio is caused by share prices inflating vs dividends being reinvested

bowlhead99 wrote: »

So how would you explain the Acc funds being relatively more valuable than the Inc funds by the exact amount of the dividend every time there's a dividend?

That I do not know. Where can I find what dividends were paid to a fund? Cavendish only shows up to 2014 for Fundsmith

bowlhead99 wrote: »

If you suspect that level of subterfuge and impropriety, you might be better off giving up investing in financial products

With my ISA on course to make 1% in year 1 while my cash savings are generating 9% I've been wondering the same

eskbanker

Dird wrote: »

my cash savings are generating 9%

Go on then, I'll bite....

How are you earning 9% from your cash savings?

coyrls

Dird wrote: »

I think this is a big swindle. Isn't the point of Acc for it to be re-invested? Where is the proof this even happens? I imagine re-invest = buy more units.

In this thread here: https://forums.moneysavingexpert.com/discussion/5422630 I gave you the link to the annual report for your specific acc fund (Fundsmith Equity): https://www.fundsmith.co.uk/docs/default-source/documents---reports-accounts/2015-short-form-report-for-the-twelve-months-ended-31st-december-2015.pdf?sfvrsn=4 and directed you to the line in the accounts: "Retained distributions on accumulation shares" where the reinvested dividends in accumulation units was documented. What more proof that it's not a swindle do you need? Do you really, really believe that fund managers are stealing the dividends and nobody is noticing?

I actually put a bit of effort into finding documented proof for you but it appears that I wasted my time.

bowlhead99

Dird wrote: »

Why would it? Today my price is £15, Tomorrow those companies pay £2 worth of dividends; if I take it as cash the fund should be worth £15 still while I have £2 cash.,

That's a nonsense.

The value of the fund is based on the market value of all the assets it holds, which include companies which are making profits. As the companies make profits, the market thinks they are more and more valuable over the course of a year. So at the end of the year the fund might have £150million worth of shares in listed companies, even though the shares in those companies had only cost £125m a year earlier.

Then one day, the companies declare and pay dividends. The fund gets some cash in its bank account but its shares in the companies are not worth £150m any more. Because, for example, one of the shares was, e.g. Lloyds Bank, who was worth £50bn, but part of the reason for them being worth £50bn was because they had £2bn of cash in the bank from all their profits. So Lloyds pay out the £2bn in cash to its owners (including the investment fund) and all of a sudden the market thinks they are only worth £48bn instead of £50bn, because owning a share in the company no longer carries a right to receive £2bn (2p a share) of dividends.

Lloyds is now trading in the stock market on an 'ex-dividend' basis so the share price drops from 50p to 48p and the Fund's holdings are worth £48m not £50m. But the fund has £2m in the bank so it still has £50m of total value.

This happens with all the other companies and the fund ends up with £20m of dividend income so it is now holding £130m in company share value and £20m of dividend. In total this is still worth £150m which is comfortably higher than the £125 it paid. Some of that is due to dividends (profits the companies paid and earned) and some is due to capital growth (retained profits that weren't paid out by the companies to their owners) and general market perceptions of what the shares are worth in the current economy.

So at this point the fund has £130m of investments in companies and £20m of cash in the bank. The fund has 10 million shares in issue so each share is worth £15.

Then in an Inc fund, the fund pays the £20m (£2/share) to its owners, you and me. The fund now only has £130m of assets and £0 cash, total £13 a share. How the heck should your share in the fund still be worth £15? £2 of it has moved into your back pocket.

In an Acc fund, the fund doesn't bother paying out the £20m (£2/share) cash, it just reinvests it in other shares on the stock markets so that its total assets is once again £150m of investments and £0 of cash.