Accumulation vs Income (Distribution) units

Abram918

OK so this might be a stupid question. Investment fund units can be Accumulation or Income (Distributing). In the latter you get dividends paid to you direct, in the former they are just reinvested and this process is not visible to you as the investor. But the market price for each type of unit increases (or decreases) at the same rate. (Like you would get the same return on selling regardless of if it's Accumulation or Income.) So all this means that if you have Income Units you get the dividends AND you get the same amount of market price increase. I would have thought that for Accumulation units the market price would increase at a higher rate than it does for the Income units.

eskbanker

Abram918 said:

I would have thought that for Accumulation units the market price would increase at a higher rate than it does for the Income units.

It does, what made you think otherwise?

Notepad_Phil

Abram918 I think you might have missed the fact that Income units will drop in price relative to the Acc version when the dividend is paid out.

ColdIron

Abram918 said:

But the market price for each type of unit increases (or decreases) at the same rate. (Like you would get the same return on selling regardless of if it's Accumulation or Income.)

No it doesn't. The unit price of the Inc units decreases relative to the Acc units on the Ex Date to reflect the dividends being removed from the fund

So all this means that if you have Income Units you get the dividends AND you get the same amount of market price increase.

No, see above. Otherwise everybody would buy Income units

I would have thought that for Accumulation units the market price would increase at a higher rate than it does for the Income units.

It does. Compare a chart of both classes without dividends reinvested and it is clear that the Inc units drop in price on the Ex Date

dunstonh

 Investment fund units can be Accumulation or Income (Distributing). In the latter you get dividends paid to you direct

Not necessarily.   Inc units mean the dividends are distributed but the investor has choices beyond just receiving them directly.  They can have them paid into their cash account within the wrapper and then reinvested into the same fund or alternative funds.  It doesn't mean they have to be paid directly

 But the market price for each type of unit increases (or decreases) at the same rate. (Like you would get the same return on selling regardless of if it's Accumulation or Income.)

No it doesn't.  The ACC class unit price increases due to growth and dividends.  The INC class due to growth but no dividends.

Abram918

I really want to post an example but I'm too new to have permission to post links.
Let me try partial links. So if you go onto the Morningstar website.
The pages are
... /uk/funds/snapshot/snapshot.aspx?id=F0GBR06IDJ&tab=1
... /uk/funds/snapshot/snapshot.aspx?id=F0GBR0602K&tab=1

The price change rates seem to be identical for these two. In fact, if anything, the increase for the Income Units is slightly higher. For example where the Accumulation is 4.27 the Income is 4.29.

Again, just to repeat, I know what I'm saying is obviously wrong, I'm just trying to figure out why/how I'm wrong. I know I'm wrong because, like ColdIron said, then everybody would just buy Income units (it would be a 'no-brainer'). I am an absolute beginner in this kind of finance stuff and I have got no idea what I am talking about!

eskbanker

I'm more familiar with Trustnet's charting tool than Morningstar's (which I find less user-friendly and flexible) - it allows income units to be shown with or without dividends reinvested, and choosing the latter option for Inc units (B) versus the Acc unit price (A) clearly demonstrates the divergence over time:

EthicsGradient

Abram918 said:

I really want to post an example but I'm too new to have permission to post links.
Let me try partial links. So if you go onto the Morningstar website.
The pages are
... /uk/funds/snapshot/snapshot.aspx?id=F0GBR06IDJ&tab=1
... /uk/funds/snapshot/snapshot.aspx?id=F0GBR0602K&tab=1

The price change rates seem to be identical for these two. In fact, if anything, the increase for the Income Units is slightly higher. For example where the Accumulation is 4.27 the Income is 4.29.

Again, just to repeat, I know what I'm saying is obviously wrong, I'm just trying to figure out why/how I'm wrong. I know I'm wrong because, like ColdIron said, then everybody would just buy Income units (it would be a 'no-brainer'). I am an absolute beginner in this kind of finance stuff and I have got no idea what I am talking about!

You'll notice the pages both say "total returns", in their titles, and in the table describing the returns over various periods - which means the page for the income version is with dividends reinvested. The 0.02% difference may be something to do with the exact moment the period starts and ends and when the dividend payouts were in it - notice that the example you give of 4.29% for income and 4.27% for acc (1 year compared to category index) is the other way round for the annualised return over longer periods - acc, at -0.69%, -0.36% and -3.36% is slightly better than inc (-0.71%, -0.38%, -3.38%). 
The full links:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR06IDJ&tab=1
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR0602K&tab=1

dunstonh

The price change rates seem to be identical for these two. In fact, if anything, the increase for the Income Units is slightly higher. For example where the Accumulation is 4.27 the Income is 4.29.

I don't need to visit the links as I can tell what you are doing.  You are looking at total return.  Not unit price only. 

i.e. total return of the Acc units and total return of the Inc units with income reinvested.

Abram918

I think I understand now! Thanks for all your help folks.
PS I agree with eskbanker: Trustnet's tools are better than the ones on Morningstar.