Acc funds - how can you be sure they reinvest?

ColdIron

mrje103 wrote: »

As far as I can tell, nothing is showing on my statement to indicate that a dividend has been reinvested

As others have said the unit price of the Inc units will decrease at the ex-dividend date (rather than by acquiring more Acc units). If you hold your Acc units within an ISA or SIPP you will not see anything on your statement, there wouldn't be much point, but if you held them unwrapped you will see the amount of the dividends retained (and reinvested) as you have to account for them to HMRC

Tom99

ColdIron wrote: »

As others have said the unit price of the Inc units will decrease at the ex-dividend date (rather than by acquiring more Acc units). If you hold your Acc units within an ISA or SIPP you will not see anything on your statement, there wouldn't be much point, but if you held them unwrapped you will see the amount of the dividends retained (and reinvested) as you have to account for them to HMRC

Yes you do but depending on your platform you may only see the dividend quoted in your year end tax certificate.

bowlhead99

mrje103 wrote: »

After some advice/information on acc funds and how they ‘pay’ their dividends.
As I understand it, acc funds automatically reinvest the dividends into the fund and so might be preferable for someone looking to try and grow a pot of money. But how can you be sure that this is happening?

You probably have this figured out by now from the other answers but the way I explain it is:

During the year, the fund receives cash dividends from the companies into which it has invested, like Microsoft, HSBC, Shell etc. The cash arrives into the fund's bank account.

If you use an INC (distributing) class of the fund, they will periodically pick up some of that cash (after paying the running costs of the fund) and send it to you as a dividend. When they do that, you will have a little pile of cash in one hand but the fund you hold in your other hand has dropped in value, because it just sent you that pile of cash, and now there's less money in the fund's bank account.

As there is less money in the fund's bank account, it can't afford to buy any new investments - because it keeps sending the spare money that it receives from Microsoft and Shell etc to you, and to all the other owners of the INC fund class.

Whereas:
If you have an ACC (accumulating) class of the fund, you have basically told them that you don't want to receive the dividend cash. You will allow the fund to keep it. So during the year the fund continues to receive dividend income from Microsoft and Shell etc, and the cash piles up, but then instead of sending the spare money out to you at the end of the year, they don't, because you don't want it.

This means the spare money in the fund's bank account which they had allocated to you can be used to buy more shares of Microsoft and Shell etc etc. So the fund has more investments, and the shares of the fund will definitely be more valuable than if they kept using their cash to send you dividend money.

So
-with an INC fund, every so often the value of the fund shares in your left hand would drop as they send cash dividends out to your right hand. You have essentially broken off a piece of the fund's value and taken it for yourself, to put in your bank or spend or buy new investment fund shares, or whatever.

-with an ACC fund, all the money stays in the fund which you are holding in your left hand, so it is heavier than it would otherwise have been, whereas there is nothing in your right hand because you didn't want to receive a cash dividend.

What this means is, the answer to 'how do I know they are reinvesting the dividends' is as simple as - did they send me any cash? If they didn't, they've still got it!

And you can prove this by seeing that the INC share price drops (or doesn't go up as much as the ACC share price), on the day when they reach the official 'ex-div' date and prepare to put the dividend money into the investors' bank account instead of keeping it in the fund's bank account.

Starting to wonder if it would be preferable to hold income funds and then just reinvest the dividends myself.

If you want the extra admin hassle, sure. But it won't get you any extra value.

If you choose INC, then every so often you are breaking off a bit of the fund value that was sitting in your left hand to put cash in your right hand. You can then reinvest it by pushing that cash back into your left hand. But the total value you would end up with in your left hand is just the same as if you had used ACC, where they accumulated the money in the fund in your left hand, and never threw cash out into your right hand, so you didn't need to push it back into your left hand. You get to the same place

example:
You had 100 shares of a fund that started off being worth £100 per share but over the course of the year received dividends worth per share from the companies in which it invests, so the fund is worth £102 per share at the end of the year (£100 of companies and £2 of cash).

The Inc version pays out the £2 per share of cash, to you and the other owners, so its value drops to £100 per share again (£100 of companies and £0 of cash). Meanwhile you personally get 100 x £2 cash in your account. With this spare £200 of cash in your account, you can buy more shares if you like... They are valued at £100 each, so your £200 would buy 2 shares. The fund when it receives your £200 will spend it on buying companies. So you end up with 102 shares total, each representing £100 of value, and fully invested in companies.

By contrast in the Acc version which was also worth £102 per share (£100 of companies and £2 of cash) does NOT give the cash to its investors. It simply spends the £2 buying more investments in companies, so it has £102 of companies and £0 of cash. And you still own your original 100 shares of the fund, because you didn't get any cash, and couldn't afford to buy any more shares.

As you can see, whether you use the ACC version or instead use the INC version and reinvest, you get to the same place: either 100 shares worth £102 each (fully invested in companies); or or 102 shares worth £100 each (fully invested in companies).

eskbanker

I usually take the view that a picture is worth a thousand words (not that I'm in any way denigrating or trying to compete with the average length of a post from a certain esteemed regular ) - the divergence in value of the Acc variant of VLS80 (A below) from the Inc version (B) at the April dividend declaration date is very clear in a chart:

lindabea

Bowlhead99- Thank you for the above explanation. You really have a talent for expressing things in a very simple way to understand. And thank you for your time and patience.