Investment - Accumulation vs Income

Thrugelmir

JohnWinder said:

bostonerimus said:

JohnWinder said:

Why do these funds exist in two forms, rather than just a single fund in which you have the option to choose, and choose again and again, whether you want income or accumulation? Whose interest are best served by having two fund types?

It's a UK thing. They have separate accumulation and income funds and don't have the convenience of having a single fund with the option to reinvest capital gains distributions, dividends and interest or have the money deposited to a cash account if you choose.

Thanks. But why is it like this? I can't see how it's in investors' interests to need to commit to one type of fund, when an alternative would be that there is one fund, and as often as one wishes one makes an election for it to be reinvesting distributions or paying them out. Is there some interesting history behind the way it is?

Nothing particularly interesting. The US and UK have had divergent approaches to taxation on investment income and gains for a long time. As a seasoned investor surprised you aren't aware of this. 

dunstonh

As an alternative, I'd suggest keeping the 2 kinds of units, but giving investors the ability to switch between them on request, with this being done as a proper conversion, i.e. without selling and buying back again. (There has recently been some work done to facilitate conversions between dirty vs clean vs superclean fund classes, so doing this for income vs accumulation would perhaps work in a similar way.)

Many platforms allow conversion between inc/acc.  Although a good number do not.

jamesd

JohnWinder said:

Thank you. Both historical reasons, front loading charges and no computers, are now history. I'm putting my hand up to vote for one fund with the convenience for investors to elect taking or reinvesting distributions according to their changing needs. And in setting it up they can make it do-able online.

One fund is less convenient for investors outside a tax wrapper.

You don't escape your liability for income tax and capital gains tax by having accumulation units, it just becomes harder to get the numbers you need to fill out your tax return because:

1. You don't have a clear report of distributions (whether interest or dividends) to use because they are reinvested behind the scenes in accumulation units.

2. You don't have a clear picture of capital gains because you have to strip out the effect of all of the internal reinvesting to work out the taxable gain.

So if outside a tax wrapper, pick income units if you want a simpler life. Inside one the tax is irrelevant but you might want the income to pay charges, reinvest elsewhere or withdraw without any need to sell, even if you're picking based on total return not what's distributed

In market downturns income units also have the advantage that you're getting pure income out without any selling of the depressed value capital. With accumulation units you've no choice but to get a chunk of sold capital at the same time

Having retired I'm now gradually preferring income units whether inside or outside a tax wrapper for the reasons given, particularly the selling capital during downturn one during drawdown. I still invest based on total return but the extra benefits that income units can offer are interesting.

Sea_Shell

jamesd said:

JohnWinder said:

Thank you. Both historical reasons, front loading charges and no computers, are now history. I'm putting my hand up to vote for one fund with the convenience for investors to elect taking or reinvesting distributions according to their changing needs. And in setting it up they can make it do-able online.

One fund is less convenient for investors outside a tax wrapper.

You don't escape your liability for income tax and capital gains tax by having accumulation units, it just becomes harder to get the numbers you need to fill out your tax return because:

1. You don't have a clear report of distributions (whether interest or dividends) to use because they are reinvested behind the scenes in accumulation units.

2. You don't have a clear picture of capital gains because you have to strip out the effect of all of the internal reinvesting to work out the taxable gain.

So if outside a tax wrapper, pick income units if you want a simpler life. Inside one the tax is irrelevant but you might want the income to pay charges, reinvest elsewhere or withdraw without any need to sell, even if you're picking based on total return not what's distributed

In market downturns income units also have the advantage that you're getting pure income out without any selling of the depressed value capital. With accumulation units you've no choice but to get a chunk of sold capital at the same time

Having retired I'm now gradually preferring income units whether inside or outside a tax wrapper for the reasons given, particularly the selling capital during downturn one during drawdown. I still invest based on total return but the extra benefits that income units can offer are interesting.

In a downturn would the INC units still be providing the level of income you may need?   You may still need to sell capital units.

ColdIron

That's what a decent sized cash buffer is for. While the capital value can drop alarmingly, dividends usually fare much better. The directors are reluctant to cut distributions as share holders don't like it. Investment trusts hold up particularly well as they can use reserves to smooth the income flow (obviously this can't last forever)

Over the past 18 months I haven't noticed a significant reduction in income from my SIPP or GIA

JohnWinder

Thank you, Maybe I don't get that. Try this:

In a taxed situation, accumulation is messy because you need to have accounting records for tax on income and gains.

Here's a suggested solution: each time your distributions are reinvested you get a report from the fund or registry that says how much you got, many new units you bought and at what price, and how much is left over to go towards the next distribution's purchase of new units.

You don't have a clear picture of capital gains because you have to strip out the effect of all of the internal reinvesting to work out the taxable gain.

Yes, there's a bit of record keeping there; maybe too much if individuals have to do it, but it's do-able with a computer.

In market downturns income units also have the advantage that you're getting pure income out without any selling of the depressed value capital. With accumulation units you've no choice but to get a chunk of sold capital at the same time

Yes, but I'm suggesting that you could request dividends to be turned back on, and reinvesting dividends be stopped at your pleasure. What's not to like?

Lastly, if none of that works for you outside a tax wrapper, buy the one and only fund and from the start elect not to reinvest. Doesn't that work?

eskbanker

Am I missing something here or is this just idle speculation about a hypothetical situation?  Is there any evidence that fund managers actually feel the need to change the structure of their offerings, or is this a solution looking for a problem?

Thrugelmir

ColdIron said:

 Investment trusts hold up particularly well as they can use reserves to smooth the income flow (obviously this can't last forever)

Investment trusts can also distribute capital reserves now. Makes for good PR for the trust concerned to say we've paid increasing levels of income for 50 years. 

JohnWinder

As an alternative, I'd suggest keeping the 2 kinds of units, but giving investors the ability to switch between them on request,

I'll vote for that one too.

dunstonh

You generally find that it is the cheap platforms that dont offer full functionality that are missing the conversion option.   How many people would be willing to pay more to get full functionality?