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Unit Price & Total Return

Discussion in 'Managed Funds & Index Funds' started by Brad, 4th Jul, 2006.

  1. Brad

    Brad Member

    21st Oct, 2005

    Much of the discussion on the NI trusts seems to focus on the cash distribution.

    To some extent getting the cash distribution doesn't suit my circumstances, however, I do understand that many investors use it as a tool to improve cashflow for a portfolio overweight in property.

    I am more interested in the total return of the fund.

    I have attached a simple calculation that shows my investment has returned a net 2.2% pre tax (ignoring franking credits). This roughly equates to the 10% expected gross return that Steve suggests all assumptions are based on.

    The interesting thing about the performance of my investment is the timing of entry. I invested on 28 Sept 2005 with the intention of collecting the Sep distribution (based on structural reasons) at $1.1904. Less than a month later, by 24 Oct 2005 and after receiving a distribution of $0.059, the NIWT price was at $1.0600. Ouch!

    Had I invested on 24 Oct 2005, 26 days later, my net return would have been 18.84% (annualised). Of course all over time the disparity will smooth out.

    This experience, it has got me thinking about the drivers of the unit price.

    If the trust pays out all earnings, what drives the unit price over the longer run? Is there likely to be any capital growth or will the price bounce around between $1.00 and $1.20 over the longer term?


    Attached Files:

  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    There will be capital growth - otherwise the unit trust would drop back to $1.00 at the end of the year once all income is distributed. However, the component of the returns that is capital growth will typically be less (sometimes a lot less) than the income component.

    There are two drivers of unit price:

    1. accumulated profits
    2. increase in value of the underlying portfolio

    The component accounted for by accumulated profits will essentially be negated at the end of each quarter (especially at the end of the financial year), because of the distribution. However, the other driver will still lead to a rising unit price over the long term (assuming the market continues to rise over the long term).

    The key is that the fund wouldn't typically sell it's entire portfolio and be 100% in cash (although I believe this is theoretically possible). So, even though trades are continuous, not all of the portfolio is traded at one time - only a percentage of each stock is ever sold (although the fund may choose to liquidate its entire holdings of one stock for various reasons). Hence, there is always a holding of stock that will appreciate in value over time, as share prices increase (and likewise, might fall over time if the share prices fall).

    So, while the market is rising, you should expect there to be capital growth in the fund - which will be reflected in an increased unit price.

    Give your investment a couple of full 12 month cycles to really get a picture on the returns you should expect ... the last 6 months has been rather volatile on the market ... so timing of your investment would have potentially had a much bigger impact.
  3. Mark Laszczuk

    Mark Laszczuk Well-Known Member

    16th Aug, 2005
    Why didn't you buy more at the time? I would have. I was crying because I couldn't.