Hargreaves Lansdown - Corporate Action with Accumulation Fund?

Asghar

Can someone please explain this to me as I don't understand what happens to the money.
There is a thread here from years ago which has been closed.
https://forums.moneysavingexpert.com/discussion/4677257

I started investing in the Legal & General International Index Trust Accumulation Fund a few months back and today in my Portfolio I noticed that the Cost Amount has gone down and my profit is therefore higher by a same amount, even though the total value of the fund is the same.

I have read the previous thread and spoke to someone at HL today who explained that I had overpaid for some units because of the dividend dates and my Cost Amount has been adjusted down accordingly, didn't know this could happen with Accumulation units.
The ex dividend date for the fund is 6th October with payment on the 6th December.

There is nothing showing in my Transaction History, my cash balance, number of units and total portfolio balance is the same, just states that I have invested less than I actually have, it was a nice round number before now it's odd with pence.
I don't get where this money is now, will it be used to buy extra units? Am I being thick?

ColdIron

Essentially you have paid for the dividends accrued so far from the underlying holdings because you bought between ex-dividend dates. It would be unfair to expect you to pay tax on these so the money is returned to you as a 'return of capital', hence your 'cost' is reduced. You will see the money returned to your cash balance if you look under Transaction History and the Income and Loyalty Bonus tabs as an Equalisation payment with the format below

<Fund Name>
Eql - UT Cash Payment

Linton

I was going to give an explanation of "equalisation" but I only understand it for an hour or two after reading up on it and also ColdIron got there first. Essentially it's a fix to ensure the dividend tax you pay actually relates to dividends the fund received on your behalf whilst you owned the fund. It only changes the reporting of the dividends you received, it makes no difference to the actual performance of the fund.

Audaxer

ColdIron wrote: »

Essentially you have paid for the dividends accrued so far from the underlying holdings because you bought between ex-dividend dates. It would be unfair to expect you to pay tax on these so the money is returned to you as a 'return of capital', hence your 'cost' is reduced. You will see the money returned to your cash balance if you look under Transaction History and the Income and Loyalty Bonus tabs as an Equalisation payment with the format below

<Fund Name>
Eql - UT Cash Payment

Hmmm, I wondered why my dividends came in two parts - one being called Equalisation - when I started receiving them a few months ago in my ISA with AJ Bell. Does it only happen when you receive your first dividend from a fund?

The thing I also noticed is that as the Equalisation part of the dividend is deducted from the cost, the percentage increase/decrease column in my portfolio is slightly out, as it looked as if my initial investment is less than it actually was.

Asghar

Thanks for the replies.

I should have mentioned that it is a SIPP, in case that makes a difference.
It's beginning to make sense. As it stands I have the same number of units but have now paid less for them because the dividends in the fund between the ex-dividend dates were inflating the price of each unit.
I will understand fully once the money is added to my cash balance.

However, I thought that Accumulation units always had the dividends reinvested in the fund which is reflected in the price and it didn't matter when you bought the units, ex-dividend or not. Is this "equalisation" only for tax purposes then and will it happen everytime someone buys between ex-dividend dates?

Asghar

Audaxer wrote: »

The thing I also noticed is that as the Equalisation part of the dividend is deducted from the cost, the percentage increase/decrease column in my portfolio is slightly out, as it looked as if my initial investment is less than it actually was.

Yeah, I hate that, it's messing up my spreadsheet.
Hargreaves Lansdown are now telling me that the profit amount and percentage is higher than what I have actually invested.
I suppose I could add the equalisation amount onto my next lump sum (say invest £102.42 instead of £100) to bring in back into sync and a round number again.

Audaxer

Asghar wrote: »

Yeah, I hate that, it's messing up my spreadsheet.
Hargreaves Lansdown are now telling me that the profit amount and percentage is higher than what I have actually invested.

My spreadsheet is correct - it is the portfolio listing on the platform that is slightly out.

I suppose I could add the equalisation amount onto my next lump sum (say invest £102.42 instead of £100) to bring in back into sync and a round number again.

So as your fund is an ACC one, does that mean part of the dividend is actually taken out of the fund, which is surprising? My funds are INC funds so both parts of the dividend go into the cash account, so for me it's just the way it shows on the portfolio summary that is wrong.

ColdIron

Audaxer wrote: »

Hmmm, I wondered why my dividends came in two parts - one being called Equalisation - when I started receiving them a few months ago in my ISA with AJ Bell. Does it only happen when you receive your first dividend from a fund?

Asghar wrote: »

Is this "equalisation" only for tax purposes then and will it happen everytime someone buys between ex-dividend dates?

Yes it's just the tax treatment of dividends on newly purchased units. If you only make a single purchase the next dividend paid is split into two, the dividend and the equalisation payments. When the second and subsequent dividends are paid you will receive the whole dividend with no equalisation (as you didn't purchase any embedded dividends). If two years or whatever later you bought more units between ex-div dates you would get back the dividends you purchased as an equalisation and actual dividends on the new units (that the fund earned between your purchase and the ex-div date) plus dividends on your old units

Linton

Audaxer wrote: »

My spreadsheet is correct - it is the portfolio listing on the platform that is slightly out.
So as your fund is an ACC one, does that mean part of the dividend is actually taken out of the fund, which is surprising? My funds are INC funds so both parts of the dividend go into the cash account, so for me it's just the way it shows on the portfolio summary that is wrong.

People are confusing two quite different things - what is really going on in money terms and what is being reported for tax purposes. Equalisation is purely a tax reporting matter. What it does is to regard the first fund dividend actually paid out by the INC fund or hypothetically reinvested for the ACC fund as comprising two parts - 1) actual dividends and (2) return of capital. Dividend tax only applies to the first part. Subsequent dividends are treated normally as one would expect.

What is actually going on is that the underlying investments are continuously paying dividends into the main fund and for an INC fund those amounts of money are bunched together and paid out quarterly as fund dividends whereas for an ACC fund they arent.

Life is much easier if you use SIPPs and S&S ISAs and can ignore equalisation completely.

For more info, or just a different description see here for example.

bowlhead99

Audaxer wrote: »

Hmmm, I wondered why my dividends came in two parts - one being called Equalisation - when I started receiving them a few months ago in my ISA with AJ Bell. Does it only happen when you receive your first dividend from a fund?

Basically if you get to the ex div date with some shares you're holding but you haven't actually owned them all for the entire period, then when they pay out the (e.g.) 10p distribution on each share that all their investors hold, they recognise that for your pile of shares that you obtained a tenth of the way through the period actually only (e.g) 9p of it is the dividend that you earned for your period of ownership, and the other 1p was the dividend that had already been earned by the fund at the time you bought in.

When you bought in, you paid the fair NAV of the fund at that time, but some of that NAV is cash that the fund had earned as dividends from investee companies since the last time the fund allocated income to its investors. Therefore when you bought in you were buying the cash representing the non-paid-out income as well as actually buying fund shares.

Ultimately the fund has a requirement to pay out all its income, so the way it's going to make sure it does that is pay all the shareholders a full 10p at the end of the period. But as that income isn't all "your" earnings they tell you that 9p is earned dividends and the other 1p was just income you bought, coming back to you. So you think you had paid £100 for each fund share but at the completion of the equalisation process you get this 1p back and therefore your cost actually spent on shares is £99.99. With ACC units the other 9p of dividends gets reinvested within the fund and you never see them, but you do still get that 1p "returned" in terms of what you really spent on what units.

If you're following that...

... you can imagine that there will be one of these funny "equalisation" payments whenever you acquire units in between ex div dates, if the amounts of dividends 'bought' are material in the context of total allocated income for the period. So, it would affect not simply the first dividend you get for each fund... but potentially the first dividend for each of the shares you bought.

As such, if you keep buying new shares and adding them to your existing holdings, you will keep getting equalisation amounts for those new shares, though not for your old shares that you held for the whole dividend period. However, those new purchased shares will become a decreasing proportion of your total holdings as you get more and more holdings. So the equalisation might cease to be noticeable.

Audaxer

Linton wrote: »

People are confusing two quite different things - what is really going on in money terms and what is being reported for tax purposes. Equalisation is purely a tax reporting matter. What it does is to regard the first fund dividend actually paid out by the INC fund or hypothetically reinvested for the ACC fund as comprising two parts - 1) actual dividends and (2) return of capital. Dividend tax only applies to the first part. Subsequent dividends are treated normally as one would expect.

What is actually going on is that the underlying investments are continuously paying dividends into the main fund and for an INC fund those amounts of money are bunched together and paid out quarterly as fund dividends whereas for an ACC fund they arent.

Life is much easier if you use SIPPs and S&S ISAs and can ignore equalisation completely.

My funds are in an S&S ISA so although the first dividends come in two parts, the only effect it has is that the initial cost in the portfolio summary has the equalisation part deducted.