"What happened to the price of my mutual fund?" is a common question heard at the end of the year. If the price of your mutual fund has taken a significant drop (e.g., 5 - 25%) lately, then there is a good chance that you havenít really lost any money. The more likely explanation is that the fund company has issued a distribution for your fund. For example, the fact that the price of Trimark Fund dropped from $27.02 on December 23, 1997 to $21.59 on December 24 was not the result of bad luck on the part of that fundís managers. In fact, Trimark Fund actually lost only $.03 on December 24. The reason is that Trimark issued a distribution on December 24 for this fund in the amount of $5.40 per share.
Even though someone else is managing your money, mutual fund companies must make distributions so that you can properly complete your income tax return. If you have your mutual fund investments inside an RRSP, you do not need to worry about reporting these distributions on your income tax return. But as a user of GLOBEfund, it is useful to understand how distributions work and how globefund treats them.
A distribution can be the result of three types of income: interest income earned from money market and bond funds; dividend income earned from dividend payments for an equity investment; and capital gains earned from realized capital appreciation (selling an investment for more than was paid for it). In the case of capital gains, the size of the gain (i.e., of the distribution) is a direct function of the shares that the fund manager has sold for a realized gain during the period covered. Active fund managers tend to have higher capital gains on a percentage wise basis than fund managers who buy and hold for the long haul.
For Income/Bond funds, and Growth and Income funds, distributions are generally made once per quarter or in some cases once per month. For Equity funds, the distribution is usually made once per year at the end of the calendar year. The distribution amount for a fund can be made up of one or more of the three types above (e.g., it could be composed of interest and capital gain). Outside an RRSP, the type of income is important since the tax treatment of these sources of income is different. Your mutual fund company will issue the appropriate slips that must accompany your income tax return.
Inside an RRSP, the most common practice of investors is to re-invest such income by purchasing additional shares in the fund. Alternatively, you can request that distributions be placed in your cash account, where they are not touched until you give your fund company further instructions. Assuming re-invested distributions in the above Trimark example, if you had owned 1000 shares on December 23 and the distribution was $5.40 per share, you would receive a distribution amount of $5,400. On that same day, Trimark would have automatically re-invested this amount by purchasing an additional 250.1158 shares, so that the total number of shares you owned on December 24 was 1,000 + 250.1158 = 1250.1158 shares. In this way you start the day on December 24 with the (approximately) same total dollar value as you ended the day on December 23.
Measuring a fundís performance by looking at a fund price strictly as reported over time does not provide a true measure of a fundís performance. For example, on November 30, Trimark Equity closed at $27.54, while on December 31, it closed at $22.05, which appears on the surface to be a monthly loss of 19.93%. But by the time the distribution is factored in, this fund actually had a healthy monthly gain of 6.72%.
Here's how globefund accounts for distributions when computing fund performance. On the date of a distribution, we compute the amount of a distribution as a percentage of the price of the fund for the preceding day. We then adjust all fund prices from the preceding day backward in time by reducing them by that percentage amount. This provides us with an adjusted net asset value per share. Using this new set of values over time, we are able to compute such measures as one day, one week, and three year percent changes for the fund.
This adjusted net asset value per share is the same data that we use to create price charts of globefund. It is also the same data we use to compute percent change over time for price comparison charts (e.g., when comparing the performance of a fund to the performance of the TSE 300). For this reason, the adjusted fund prices on a globefund price chart may not match the prices as reported in old editions of The Globe and Mail. On the other hand, adjusted prices are much more useful in determining at a glance the general performance of a fund over time.
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