H&L Profit/Loss Calculation

rick999

I have an account and a small portfolio of funds with H&L and not very happy with the way that the account information (Gain/Loss) is expressed. As an example:


I spend £1,000 on a fund and then an Equalisation payment is made of £20 and the cost of the fund is then expressed as £980. If the current value of the fund, is say £1,050, then H&L will express my profit as +£70 (current value - cost). However, as far as I am concerned my profit is just £50 and any adjustment due to the cost price is just notional - all I am interested in is absolute Gain or Loss of my investments. I think the way H&L calculate the value of Gain/Loss is very misleading and not very useful.

How do other brokers/platforms express Gain/Loss? I have emailed H&L support regarding the issue and was assured that the method outlined above is normal for all brokers?

Any comments regarding the matter would be appreciated.

george4064

HL would've returned £20 back to you, thus adjusted the cost to £980.

Why don't you/didn't you just re-invest the £20?

rick999

No... H&L did not return the £20 back to me.... thats the problem. Below is the explanantion I recceived from H&L:

The corporate action that you are seeing is an equalisation payment. An equalisation payment occurs when you purchase a fund between the previous and next dividend payment date. When this occurs, part of the next dividend has already accrued in the price you paid for the units. As a result, when you bought the units you had in fact paid for part of the dividend. This portion is identified within the next dividend as equalisation and is regarded as a return of capital. This amount is taken off the original total investment cost to show the true cost you paid for the units; i.e. the original unit price less the dividend portion of that price. As a result the investment cost shown for your fund has now reduced by the amount of the equalisation.

Your original cost minus the equalisation payment is a truer reflection of your cost than it would be if we did not factor in equalisation. This is an industry standard and most if not all stockbrokers will show your cost in a similar way.

bowlhead99

HL seem to have it right. What you are seeing is the effect of joining the fund part way through a year. For example:

If they are generating enough income to pay out £30 of dividends every six months to every holder of 100 units, because they are generating income at £5 a month, then when you join the fund in October, you will receive, like everyone else, the £30 at the end of the year.

However, of that £30, only £10 (the November and December fivers) were generated as income on the investments bought with your money. The £20 of income generated from underlying companies that paid them dividends in July, August, September and October which is going to be paid to you as part of the £30 payment at year-end, had already been made as income before you joined the fund. It was sitting there, earned, awaiting payout. The people who were in the fund before you, whose investments earned it, have long gone and do not qualify to receive it. But the fund tax rules say the fund has to pay out all its income every year. So they are going to physically give it to you.

For example, the fund might be invested in UK companies. The half-year dividend income from Direct Line was earned by the fund in August. The Royal Mail Group one was earned in November. So if you join the fund at the end of October you would hope to receive the RMG money in due course but you do not want to be receiving (and potentially paying tax on) a dividend for the Direct Line payment that was already earned by the fund in August before you decided to buy in.

What this means is, when you bought into the fund, your £1000 subscription bought £980 of investment assets (shares in underlying companies, generating ongoing income and gains) and £20 of cash which is sitting around to be paid out as part of the £30 year-end dividend payment once you have earned the November and December amounts which will be paid out with it. So what you will get on dividend payment day is £30, made up of £10 of income you earned and £20 of cash that you bought, which is not taxable dividend income.

Because once they get to the year end, they are going to send the same amount of money to every investor who has the same amount of shares on the night before ex-dividend day. They don't want to send you £10 at year end and me £7.56 and George £35.82, they are going to send us all £30 because we all hold the same amount of shares. However, you and I were only in for part of the half-year, so we clearly didn't 'earn' £30 of income, because much of the income taken in by the fund was already earned before we decided to buy in.

Once the dividend information is available from the fund manager and he's calculated all the equalisation amounts, he can inform us (or our platform). The platform is adjusting your cost statistics for your convenience.

Effectively you paid £1000 to them and they paid £30 back to you. The true way to think about it is that after paying £1000 they gave you £20 of it back (leaving an investment which really cost £980) and then paid £10 as dividends which you earned in the two-month period.

You might like to think of it, that you have a £1000 investment which has earned £30 income in only two months. But that would be unrealistic, it implies you could go on like that and end up with £180 a year, 18% income...

Alternatively you might like to think that after paying £1000 and getting back £30, you just have an investment that cost £970 and no income. But that is unrealistic too, because you are definitely earning income, and depending how much you earn per year (if not in an ISA or tax wrapper), it might be taxable, so it would be dangerous to think like that.

So they are presenting it in the way you would need to have it presented to know how much of your investment performance is income and how much is gain.

Now, you might have already turned off reading this in frustration several paragraphs up, because you said "I did not receive the £20 back". There are probably a few potential reasons.

One of them is that unless you bought in on the last day of the year, the £20 would not be the entire payment you would expect to see coming into your account. In my example you would expect to see £30 because the £20 is bundled together with the £10 of genuine dividend income. You are not going to get a separate £20 payment, it is included in the £30 cash you'll receive.

Second, perhaps you have not received the £30 yet but the platform has received the information from the fund manager and the fund has gone ex-dividend at the end of the year so you are officially owed the £30 and will receive it in due course.

Third, perhaps you are in an 'accumulation' version of the fund where dividend entitlements - though calculated accurately in the same way as an 'income distribution' fund - are not actually paid out but are internally reinvested for your convenience, instead. So you would never 'see' the £30 because you'll never physically receive it.

If that latter one is the case (an ACC fund), HL are probably missing a trick: they have adjusted your cost base downwards to £980 for the known equalisation amount but perhaps also need to increase your cost base again for the fact that the £20 equalisation got reinvested internally in the fund and the £10 dividends got reinvested internally in the fund so the true cost of what is valued at £1050, is now £1010. But as they are a large and popular platform you would hope they wouldn't do "half" an adjustment for you in this way, although it's better than nothing.

Think carefully, could any of those scenarios apply to you? I think you are probably just misunderstanding the concept of an equalisation payment.

rick999

@bowlhead99: Thanks for extensive reply.....


Yes... I hear what you are saying... I think I do understand the concept of Equalisation Payments, but I am still not happy with the way my account info is displayed. I don't care what the cost of my investment was with Equalisation Payments taken into account... all I am concerned with his how much money I have made or lost... the absolute gain.


To clarify the units that I hold are Accumulation units;


I buy 838.926 units @1.192 = £1,000


Subsequently an Equalisation Payment is made for £5.54


My account now shows that I have:
838.926 units
Cost of fund = (1000 - 5.54) = £994.46
Current price/unit = 1.2299
Current value of fund = (838.926 * 1.2299) = £1,031.80


Gain = (1031.80 - 994.46) = £37.34


Okay.... this might be naïve of me, but is the value of the fund is £1,031.80 and it cost me £1,000 then my potential profit is just £31.80 and NOT £37.34. At the end of the day this is the only number I am concerned with.... !

bowlhead99

In that case it sounds like what they are doing is the following:

bowlhead99 wrote: »

Third, perhaps you are in an 'accumulation' version of the fund where dividend entitlements - though calculated accurately in the same way as an 'income distribution' fund - are not actually paid out but are internally reinvested for your convenience, instead. So you would never 'see' the £30 because you'll never physically receive it.

If that latter one is the case (an ACC fund), HL are probably missing a trick: they have adjusted your cost base downwards to £980 for the known equalisation amount but perhaps also need to increase your cost base again for the fact that the £20 equalisation got reinvested internally in the fund and the £10 dividends got reinvested internally in the fund so the true cost of what is valued at £1050, is now £1010. But as they are a large and popular platform you would hope they wouldn't do "half" an adjustment for you in this way, although it's better than nothing.

The idea of adjusting the base cost downwards for the dividends that you purchased is completely normal and you would expect most competent platforms to do it for you. For most people it is important to be able to easily split out how much they have spent on capital cost of their fund and how much they have received in income which they may or may not have decided to invest back in.

However, while HL's method is useful for those people in Inc funds who are getting the divs and equalisation paid out to them, it only goes halfway for those in Acc funds. In an Acc fund your proceeds are being constantly reinvested.

So, assuming you do understand the equalisation concept, you will have had an undisputable original cost of £994.46, BUT since then you have reinvested the £5.54 of equalisation money on top of that, and reinvested the dividends on top of that... and so your real total cost of investment for any future "capital gains tax" calculations when selling units later, is something greater than £1000. Maybe £1005. And it is a number that will increase over time as you continue to have more dividend income reinvested on your behalf.

I can see that from your point of view, you don't care about how your total return has come about. Many people do want to know how their returns are generated (income vs capital value changes), firstly because of the tax implications and secondly because how a fund generates its total returns can be an interesting point of comparison between different funds as we move into different parts of the economic cycle. So it is useful that they are trying to do adjustments for their investors based on the corporate action information that they receive. But it seems the way they are doing it does not give a properly useful result for people in Acc funds. I am not an HL user so can't comment if there is a different screen somewhere else that would help.

Now you've explained it is an Acc fund with no cash proceeds received, I do understand your problem that the comparison of £1031.80 with £994.46 is overstating your unrealised gain because it ignores the fact that the £994.46 cost increased again when the £5.54 was reinvested for you. And it further increased when the dividends were reinvested.

So the reality is, you have a real capital cost of over £1000, and an unrealised capital gain of something less than £31.80, and separately you have a realised income of £x (shown on your tax vouchers).

Do you follow that? If so, and if it were me corresponding with HL, I would take the HL team's response to you and write back as follows:

THEM:
The corporate action that you are seeing is an equalisation payment. An equalisation payment occurs when you purchase a fund between the previous and next dividend payment date. When this occurs, part of the next dividend has already accrued in the price you paid for the units. As a result, when you bought the units you had in fact paid for part of the dividend. This portion is identified within the next dividend as equalisation and is regarded as a return of capital. This amount is taken off the original total investment cost to show the true cost you paid for the units; i.e. the original unit price less the dividend portion of that price. As a result the investment cost shown for your fund has now reduced by the amount of the equalisation.

Your original cost minus the equalisation payment is a truer reflection of your cost than it would be if we did not factor in equalisation. This is an industry standard and most if not all stockbrokers will show your cost in a similar way.

YOU:
Thank you for the summary of why the invested cost was reduced by the amount of equalisation received. This would make sense for a fund distributing income and equalisation monies back to me and I can see why it would be the industry approach for such a fund.

However, this is an accumulation fund and I receive no cash distributions. As I understand it, the equalisation monies were immediately invested back into the fund, and any dividends attributable to my holding were also invested back into the fund.

Therefore - while I understand the rationale for the cost of investment being initially reduced as the £5.54 equalisation was 'paid' (the corporate action to which you refer) - the cost of investment should then surely immediately increase again as the £5.54 is then invested back into the fund. This reinvestment of the £5.54 increased my cost of investment in the exact same way that the corporate action to send me the £5.54 equalisation, reduced it.

As I have not received the £5.54 in my cash account I can only conclude it has been reinvested, and therefore to say the investment merely cost £994.46 is illogical. As the initial cost figure of £994.46 was increased by the reinvesment of the £5.54, the £994.46 cannot be a useful number to have sitting in my 'cost of invesment' table, from either a performance measurement or a tax computation perspective.

I would be grateful for your views or further explanation in case I am missing something.

Then let us know what they say.

rick999

@bowlhead99: Thanks again for your extensive and informative response. I shall email your response to H&L and see what happens... I think the guy I'm dealing with is already getting ****** with me so your response might send him over the edge!


How do other platforms report Gain or Loss??? I know this is kind of a minor point, but it is really annoying me... would I have the same frustrations with other brokers? It's just that how much money you have gained or lost is a pretty fundamental issue when you are investing!

grey_gym_sock

very good explanations, bowlhead.

i think HL do make "half" the adjustment, as you put it, i.e. they do deduct the equalisation from the initial purchase cost (for both income & accumulation units), but they don't add back amounts automatically reinvested (for accumulation units) - which would include both the equalisation and the genuine income.

iweb appear to make no adjustments to the initial purchase costs.

IMHO, ideally a platform would offer a choice of several different ways to look at the costs of your funds.

Fed

Interactive Investor seemingly report it as you would like. But i'm still waiting on what should be a straightforward tax voucher for last year so I couldn't recommend them.

Interested to hear HL's response on this matter

AnotherJoe

but they don't add back amounts automatically reinvested (for accumulation units)

---

I don't see how that would be possible. Surely that's all within the accumulation units and entirely invisible to any broker as to how much has been added. Read the accounts of the trust if you are that interested, it's not the brokers job to break that out (even if it was possible)

Not to mention, it's irrelevant, you bought the units at price X they are now worth Y and there's no argument about Y. The OPs question was about what the purchase price was, eg if it was X or X- £20 not Y. Y is always Y isn't it?

I've got a bigger annoyance with how HL show profit or loss, it's absolute, which is fine but not useful for comparing investments. Eg one may show a 10% gain the other 20% but I bought the former last week and the latter three years ago. I've asked them to allow that column to be switched to showing the gain over comparable time periods as well as since purchase. Or at least a report that shows growth over configurable time periods.

grey_gym_sock

AnotherJoe wrote: »

I don't see how that would be possible. Surely that's all within the accumulation units and entirely invisible to any broker as to how much has been added. Read the accounts of the trust if you are that interested, it's not the brokers job to break that out (even if it was possible)

yes, it may be difficult for a platform to do this. but if you don't ask for the moon on a stick, you won't get it ...

Not to mention, it's irrelevant, you bought the units at price X they are now worth Y and there's no argument about Y. The OPs question was about what the purchase price was, eg if it was X or X- £20 not Y. Y is always Y isn't it?

well, for CGT purposes (in a taxable account), the cost isn't always Y, it's Y + the income reinvested.

and for your own tracking purposes, it might be useful to separate out the effects of income reinvested and of capital appreciation. though there are a few ways to look at it.

I've got a bigger annoyance with how HL show profit or loss, it's absolute, which is fine but not useful for comparing investments. Eg one may show a 10% gain the other 20% but I bought the former last week and the latter three years ago. I've asked them to allow that column to be switched to showing the gain over comparable time periods as well as since purchase. Or at least a report that shows growth over configurable time periods.

the IRR % is 1 figure i like to look at.

there is lots of reporting the platforms could do but don't. all the ones i've used only show you any kind of % gains/losses for the investments you currently hold. i also want to know about the returns from investments i used to hold. and about the returns of the whole portfolio (including the contribution of investments no longer held).