How do we calculate returns?
When we discuss the returns of our funds some of the questions that invariably arise are; how do we arrive at the total return figure? And, how do Trusts calculate distributable income? The frequency of these questions suggests that it’s a mystery to many of our investors, so this short paper is designed to help you understand the figures we report.
This White Paper provides investors with an explanation of how total return figures and distributions are calculated for The Montgomery Fund.
Importantly, it is worth knowing the investment return and distribution calculations are not generated by Montgomery Investment Management. Fundhost Limited is the Independent Administrator and Responsible Entity of The Montgomery Fund and is responsible for all of the calculations.
To learn more about our funds, please click here, or contact me, David Buckland, on 02 8046 5000 or at dbuckland@montinvest.com.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Joe
:
Hi David,
Thanks for clarifying this.
Would it not be more informative when comparing various funds in saying that over the 1231 days (17/8/2012 – 31/12/2015) the fund had capital growth of 12.84% annually or average of 12.27% annually & average distribution of 5.69% annually?
I used the ex-distribution price to calculate capital returns.
Over 3.37 years (1231 days) that equates to a 60.53% total return?
i.e. 12.27*3.37 + 5.69*3.37
Annual GR Formula used is: (Current price / previous price)^ (1/years) -1
Dividend formula is: (Dividend / Previous price) ^ (1/years)
Previous price = start price at beginning of each 6 month term
Years in this case is 182-183 days / 365.25 days except for very 1st term = 317 days.
It is also interesting to note that in the 6 months that there was negative growth (30/12/2014-30/6/2015) of 5.26% the distribution paid was 17.1%.
Why is the distribution of the fund so high? Would it not be better to re-invest the money when the market falls so much? Roger, often talks
about re-investing all income b/c growth rate of high ROE firms and selling
parcels of shares instead.
Regards,
Joe
David Buckland
:
Firstly Joe, of the 18.9% compound annual growth, after expenses, we come up with 12.47% for capital growth and 6.44% for income.
Second, I do not believe it would be more informative Joe.
Let’s take the three years to 31/12/15, for example.
Again, the compound annual return is 15.64% (after expenses), and this is split 6.52% income and 9.11% capital growth.
By stating the 15.64% number, we can compare “apples with apples” with respect to all Australian managed funds over this period under review,
as well as the ASX 300 Accumulation Index, which assumes reinvestment of dividends, which has put on 4.04% over the period under review.
Furthermore, investors who are high marginal tax payers verses investors who come in via their Self Managed Share Fund versus investors who
come in via a private company (which may contain tax losses) will all have different tax treatments, particularly on the income component of the return.
In regards to your questions on distribution, the large distribution of 11.6653 cents was for the six months to 30 June 2015, and that is when The Fund went ex-distribution. So the return for the 6 months to 31/12/15 is all capital growth.
That is 12.74% after expenses. Please re-read the following paper http://rogermontgomery.com/how-do-we-calculate-returns-3/ with a focus on Page 5, Period 3B
If however we took the 5.86% return for the six months to 30/6/15, then this comprised 8.43% Income and 2.57% capital loss.
As to why the distribution of the fund was so high, please re-read the following paper http://rogermontgomery.com/how-do-we-calculate-returns-3/ with a focus on page 2, “Distributions”.
We do not dictate the distributions from year to year. There is a formula which effectively means the interest income plus dividend income plus net realised profits (realised profits minus realised losses) minus all expenses (administration, responsible entity, management fees, possible performance fees, custodian fees, audit fees), if positive, must be distributed. In some periods the distributable income will be negative and there will be no distribution. The distributions of all these products are highly variable and unpredictable and if your focus is on highly reliable, highly predictable income (over the shorter term), these products are inappropriate for you.
Finally, reinvesting distributions is logical when the underlying investment is rising. As stated, The Montgomery Fund at 31/12/15 had paid out an aggregate 24.4 cents per unit of distribution from inception (17/8/12). The difference between the total return ($1.8071) and the prevailing unit price ($1.5024) of 30.47 cents, is split 24.4 cents distribution with the balancing 6.07 cents being the investment return on reinvested distribution.
I hope this helps.
Joe
:
Hi David,
Thanks you for explaining the calculations.
I still have a query on how the cumulative gains are calculated.
It is not explained in the pdf & I arrive at different numbers.
e.g. for period 2A I get 34.89% or 42.17% (incl distribution) not 37.14%
Regards,
Joe
David Buckland
:
Hi Joe,
You have incorrectly added 26.33 per cent and 8.56 per cent.
If you turn $1.00 into $1.2633 and then receive an 8.56% return on that amount, you should multiply it (i.e. by 1.0856).
You then arrive at the correct answer being $1.3714 or a cumulative return of 37.14%.