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Query regarding distribution

Discussion in 'Managed Funds & Index Funds' started by Mark Laszczuk, 3rd Oct, 2005.

  1. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Hey everyone,

    Had a query from a client regarding this on the NavraInvest website:

    'Net income is distributed quarterly based on the number of units the investor holds in proportion to the number of units held by all unit holders, at the distribution date. Distributions are not pro-rated for investors who were not unit holders for the whole quarter.'

    They are concerned that their distribution may be reduced as a result of the number of investors in the fund growing and as a result the distribution shrinking due to this growth. Could someone please clarify this issue.

    My understanding is that the distribution is the same across the board for all investors, regardless of how long they were in the fund for that particular quarter. As always, happy to be corrected.

    Mark
     
  2. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Mark,

    I'm more concerned with the "distributions are not prorated for investors who were not unit holders for the whole quarter".

    I've just sent my application off last week for $560K worth of shares. It would be a major downside if I wasn't entitled to distributions from Q4 2005 because the paperwork didn't get finalised until this week! I'm not locked out of the Q4 distribution am I?!!!

    That can't be correct...

    <edit>

    Spoke to Theresa and she explained it to me. Basically you get the full distribution regardless of how long you were a member prior to it being paid. As it drops the unit price anyway the net effect is the same. e.g. distribution of 6c on a unit price of $1.18 would result in a new unit price of $1.12. Whether I bought in just after or just before the distribution my cost is still $1.12 per unit.

    Cheers,
    Michael.
     
    Last edited by a moderator: 5th Oct, 2005
  3. Simon

    Simon Well-Known Member

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    Another question?

    Another question?

    I understand that after a distribution the unit value drops according to the amount paid out... so a 5% dist will see the unit price drop 5%.

    If a fellow reinvests his distribution does he buy the new units at the pre or post dist price?

    Thanks
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

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    Yeah, but haven't you just converted 5% of your capital to income which will be taxable?
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, the more units on offer (as a result of more people buying into the fund), the less your share of the distribution will be. I think you'll find it won't make that much difference overall though - mostly there will be extra investments throughout the quarter, not all at the end ... and every one of those investments provides more purchasing power to the fund, amplifying potential profits - so more funds coming in is a GOOD THING.

    Honestly I wouldn't worry about it - you might lose out slightly now, but you will gain hugely from the extra funds in the future.

    I did up a spreadsheet to model what happens - if there is $80m undermanagement just before the end of the quarter, and then someone pours another $80m in on the last day before the distribution - then your distribution will be halved (twice as many units sharing the same profit).

    Think about that - you need to double the FUM to halve the distribution. And whoever made that investment just bought themselves a helluva tax bill. It's not going to happen ... and if I myself went and added $100K on the last day of the quarter, it's going to decrease your share of the distribution by a whopping 0.13% (that's 0.00125 to be precise) ... not very much. If you were looking at a distribution of $10K for the quarter, you would now be looking at $12.50 less as a result of my investment.

    But also imagine what the fund could do with that extra $80m during the following quarters ? You'd stand to gain far more from the extra buying power than you would from losing your distribution.

    I'm not speaking for NavraInvest here - and I may have missed something in the mix, but I think I've got it right.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, Michael's scenario generates exactly the same result regardless of whether you invest immediately before, or immediately after the distribution ... from a PRE-TAX point of view.

    As Nigel said, if you invest in the fund just prior to the distribution, you have to declare the distribution as income and pay tax on it - so unless you have other losses that you can offset the income against, you will potentially be worse off from an after-tax point of view if you invest before the distribution.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Reinvestments happen at the post distribution price - and no buy spread is applied, so reinvestments are at the real unit price.

    As a result, automatic reinvestment is slightly better (0.0015 times better) than taking the distribution as cash and then reinvesting the money back in the fund yourself because of not paying the buy spread.

    In fact it's actually better still - since you don't get the cash until a few days later (in which time the unit price may have gone up), whereas automatic reinvestments are calculated as of the unit price at the very beginning of the new quarter.
     
  8. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Thanks for the reply Sim' - it's not me that's was concerned about it, but rather a client.

    When I was at trade school, my teacher told us 'Never be afraid to ask a question, cause if you need to ask it, at least half the class needs to ask it.'

    I could easily have gotten the answer direct from NavraInvest, but felt it better to post up here so that everyone knows the answer rather than simply one client.

    Mark
     
  9. Simon

    Simon Well-Known Member

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    Thanks Sim, as they say... every 0.0015% counts :D
     
  10. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Nigel,

    Good point, and one SIM has already elaborated on. Good thing for me then that I'm buying in just after the distribution is paid so ge to keep it all capitalised for the full quarter pretty much.

    Cheers,
    Michael.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Good plan Mark.
     
  12. pthm

    pthm Well-Known Member

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    I have just read this post again and it puzzles me a bit that the navra fund distribution at the end of the quarter is not pro-rated. What I was thinking is why not investing my money for most of the quarter outside of navra, then just before the end of the quarter putting it in navra funds to get the full distribution. This way I earn the interest from the cash investment and the full distribution by navra? Could someone please explain to me why I could not have the best of both? I think maybe the unit prices have something to do with it and they are priced to reflect the growth as well as the accumulated income - however, unit prices will drop after the distribution and when the share market goes down.
     
  13. Glebe

    Glebe Well-Known Member

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    you've pretty much answered your own question.

    have a look at the growth of the unit price between the start of a quarter and the end. if it was flat, and dropped post-distribution, it would be heading towards $0. That's not the case!
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'm not speaking for NavraInvest here, but I would guess that it does indeed relate to the unit price - or more specifically, the fact that the increased unit price at the end of the quarter reflects the increased value of the fund from trading profits (plus capital growth).

    Example:

    There are 1,000,000 units issued and the unit price is currently 1.0000

    You invest 100,000 at the beginning of the quarter at unit price 1.0000, so 100,000 units are issued - total units now 1,100,000

    At the end of the quarter, they have made 4% ($44,000) trading profit and 2% ($22,000) capital growth, so the value of the fund is now $1,166,000, unit price is 1.0600

    So if someone invests $100,000 at the end of the quarter, they are putting in exactly the same amount you did, but getting fewer units for their money, since they are essentially paying for the profits already made. They only get 94339.6226 units, where you got 100,000 units at the beginning of the quarter.

    When the fund distributes the profits at the end of the quarter, it's based on the number of units you own, so if we now have 1194339.6226 units on offer, then the $44,000 is split up as a distribution of 3.6840 cents per unit distribution.

    Your distribution from your $100,000 investment is $3684.04
    The other person's distribution from their $100,000 investment is $3475.51

    The difference is their cost - their capital bought them fewer units than yours did, they get a smaller share of the distributions.

    What's more, look at what happens next. The fund distributes the $44,000 in profits (nobody reinvests - to make it easier to calculate !), so the value of the fund is now $1,122,000 ... which makes the unit price 1.0232

    Now your $100,000 investment is worth $102,315.96 ... but the other person's $100,000 is only worth $96,524.49 ... the difference is because you got the benefit of the capital gain throughout the quarter, and they didn't.

    Let's include the distributions in those figures.

    Your $100,000 is now worth $102,315.96 and you got $3684.04 in distribution, so your total value from $100,000 invested is now ... $106000 !!!

    The other person's $100,000 is now worth $96,524.49 and they got $3475.51 in distribution, so their total value from $100,000 invested is now ...... $100,000 !!!!!!! Wow, what a coincidence !

    So, you can clearly see - the value of our investment has not been diminished as a result of their late investment, and they have not received any direct benefit as a result of their late investment.

    So there's no need to worry !!!

    Hope this helps.
     
  15. Steve Navra

    Steve Navra Well-Known Member

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    I am speaking for Navrainvest :)

    Yes Sim' is correct . . . every unit holder is treated identically; by law (ASIC) no unit holder can benefit / or not benefit as a result of what other unit holders do.

    Everything is calculated per unit:

    So as Sim says, irrespective of when you invest, you will receive the number of units based on the unit price you purchase at that particular time.

    Example:
    Client "A" purchases $100,000 worth of units on day one of the quarter at 1.06 per unit ; therefore receives 94,340 units.

    Client "B" purchases $100,000 worth of units on the last day of the quarter at 1.18 per unit ; therefore receives 84,746 units. (9,954 units less)

    Both Invested $100,000
    Distribution is 5.8c per unit:
    Client "A" receives 94,340 X 5.8c = $5,472 = 5.47%
    Client "B" receives 84,746 X 5.8c = $4,915 = 4.92%

    Client "A" receives a greater return, but both have been treated (indentically) equally!

    Regards,
    Steve
     
  16. Alan

    Alan Well-Known Member

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    I only just noticed that comment Mark and I couldn't agree more........so please keep on doing it! :)

    I've always has a similar attitude in that if I have a question that relates to my specific situation I'll contact my adviser/broker etc direct, otherwise I'll post it and hopefully others will learn from my ignorance too. :p

    An important strength of a Forum such as this can often be the expert opinion available, but then this often requires (respectful) questions to be asked in the first place.


    :)
     
  17. Tzaki

    Tzaki Well-Known Member

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    I agree with Mark and Alan,

    The ONLY dumb question is the one you DON'T ask!!! ;)

    After all questions are the mind's due dilligence!!
     
  18. pthm

    pthm Well-Known Member

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    Thank you, Glebe, Sim and Steve! It all makes sense now. :) Yes, I did the calcs last night and it all felt into place as your calcs did. The distribution is the same for everyone, but the number of units vary depending on unit prices.