HL's book cost display

DoctorStrange

I'm a little confused with my SIPP at HL.

Just before the virus hit, I bought £40k of a Vanguard FTSE100 tracker. I later topped up another £15k in November,  so my total book cost is around £55k.

However, the book cost displayed on the HL App is £54k and I can't work out why. 

I'm thinking this is to reflect the value from the "dividend" in the accumulation fund but that seems an odd way to reflect that?! 

I'll check in with them but figured I'll likely get a quicker she clearer answer here

Croeso69

DoctorStrange said:

I'm a little confused with my SIPP at HL.

Just before the virus hit, I bought £40k of a Vanguard FTSE100 tracker. I later topped up another £15k in November,  so my total book cost is around £55k.

However, the book cost displayed on the HL App is £54k and I can't work out why. 

I'm thinking this is to reflect the value from the "dividend" in the accumulation fund but that seems an odd way to reflect that?! 

I'll check in with them but figured I'll likely get a quicker she clearer answer here

This would be the equalisation payment. This is part of the dividend earned / accrued prior to you buying the fund. So when you bought the fund you paid £54k for the fund and £1k for the accrued dividend (which if you look in the income tab, should appear as part of the fund dividend).

EDIT: for an accumulation fund there will be no dividend but the theory is the same.

DoctorStrange

Thanks, but can you please elaborate for me?

As I see it,  I spent £55k on a fund which hasn't moved since (current price is 0.02% lower than my average price). However,  it should have yielded around 3% in the last year so I should be seeing a total value of around £56.5k

Instead,  I'm seeing a value of £55k but which is apparently 2% (£1k) in "profit".  

I can't seem to see anything in the income/documents section to explain anything and although some of the theory makes sense,  I can't seem to reconcile that to the practice.

Croeso69

I bought some S&P fund shares for say £5,000 which is the book value.

in the incomevsection I received two dividends for this fund last week ...

When I look at the book value it has dropped by £9.73 to £4,990.27 because the £9.73 equalisation is treated as a refund of part of the purchase price.

Croeso69

Their own website explains it better ...

Croeso69

I did ask them about this a while back and this is the response I got ...

====================================================

Thank you for your email.

Your accumulation units will also have equalisation payments listed for them which will affect your cost figure.

When we carry out this process it is simply listed as a 'Corporate Action'.  

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. 

The same will apply to any other funds as and when they pay the first dividend from when you invested in the fund. 

Equalisation only applies to the first distribution made when you make a new investment into a fund.

When you hold accumulation units of a fund the return of capital doesn't involve a physical return of capital. Instead, the capital is retained within the fund and reinvested by the manager of the fund.

You can learn more about how funds work, including the equalisation process, on our Funds FAQ page here.

If you have any other questions, please get back to me. 

Regards

Liam Flaskett
Investment Helpdesk Consultant
Hargreaves Lansdown

Croeso69

If I am honest I struggle with this concept for accumulation units where an equalisation adjustment is made to the purchase price but no equivalent amount is received as income. It just makes the numbers not add up.

DoctorStrange

Its kinda makes sense in theory but as you say the numbers are harder to reconcile.

It'd be easier to keep the price the same and then add new units as the "dividend income"

underground99

Croeso69 said:

If I am honest I struggle with this concept for accumulation units where an equalisation adjustment is made to the purchase price but no equivalent amount is received as income. It just makes the numbers not add up.

Yes you're right - and you should struggle to accept it, because what they are doing to the cost figures of acc funds is not at all useful - in technical terms: it's balls.

When you buy shares or units in between ex-div dates, HL treat the equalisation element of the next dividend as a reduction of your capital cost when you get it. That is, after all, what the equalisation component of the declared distribution is supposed to represent.

When it's an income fund, a part of the first distribution paid to you is just an element of your buy-in price being given back to you, while the other part of it is officially income. So, fair enough. Knock your cost down a bit to recognise the fact that some of the money you received can't be reflected as income or profit and is just a bit of your cost coming back. They send you, say, £19, telling you that £9 is income and £10 is a return of cost. So you drop your cost by £10 and now your investment only cost you £4990 instead of £5k because the tenner's back in your bank. And you have £9 income in your bank too.

But when it's an accumulation fund, when the 'everybody gets allocated £19' time of the year comes around, you don't get a distribution into your bank. Just like with the income fund, they can tell you that you 'received' £19 of distribution that was internally reinvested, and that only £9 of it was income because the rest was equalisation. But as it was an acc fund they aren't going to send you the £19.

They allocate you £10 equalisation as part of the notional distribution, which is immediately reinvested. So as far as the tax man is concerned, your investment cost of £5000 looks like it should drop to £4990, but then that very same moment it gets internally reinvested and your cost base immediately goes back up to £5000. Then they notionally give you the £9 of income, which is also immediately reinvested that same moment, so your cost base goes up to £5009.

That £5009 figure (your original £5000 you paid plus the official £9 of income generated which has now become part of your investment cost within the Acc fund) is the number you would use in any future CGT calculation on a disposal.

Unhelpfully, because HL's systems are not very smart, they knock down the cost in your investment table to the £4990 level, just like they would have done for the Inc version (ignoring the fact that in your acc version the £4990 immediately went back up to £5000 because the fund manager kept the tenner and invested it for you), and they also ignore the fact that the £9 of income reinvestment happened, so you'll have to keep your own records of that.

The effect is that your displayed cost of £4900 is further away from your 'real' cost of £5009 than it would have been if they'd left it alone at £5000, rather than 'helpfully' deducting this £10 equalisation amount that was never even given to you.

HL's standard email response to people who can't understand why they do what they do, could be expanded on, to say:

"When you hold accumulation units of a fund the return of capital doesn't involve a physical return of capital. Instead, the capital is retained within the fund and reinvested by the manager of the fund. BUT we still pretend that the fund manager physically returned your capital and reduced your cost, even though that didn't happen. We do it because it's easier to just do it how we do it for Inc funds, rather than bother to develop our software to give you more meaningful information. We have got away with doing it for years, and if anyone queries it, we just act like they're the idiots and patronisingly tell them to go and read up what equalisation is all about, because of course our systems have done it properly."

The only silver lining to their stupid method is that in a few years time if you want to get from the incorrect figure they're showing you (£4990) to the correct cost figure allowed in tax calculations (£5009), you just need to check the published records for the fund concerned for the period since you bought in. If it says £19 of notional distribution for the year, you can just add £19 to the stupid figure of £4990 and will be at the right place. You wouldn't need to remember how much of the £19 was income and how much was equalisation.