Distributions v income distributed

[Mike]

Mark,

I have a problem with the difference between Distributed Distributions and the total of Dividends, Interest Income, and Long Term Capital Gain Distributions. The former as always less than the latter.

The Total Return report uses Distributed Distributions which would be correct if all types of income distributions were included. The differences are not identifiable but they are material. If the components are used in a TR report, the user cannot reconcile the elements. If Dist Dist is used, the report can be reconciled but I question its accuracy.

The documentation is not clear on what elements are included in Distributions.


Mike

[Mark]

Hi Mike,

"Distributed" distributions are any type of distribution that was paid out (not reinvested). The term "distribution" means any type of distribution, so it includes dividends, interest income, LT Cap Gain, etc... So, 'Distributed Distributions' means any type of payout that was not reinvested. A reinvested distribution is one where you used the money to re-purchase shares. There is a check box on the distribution dialog where you can choose whether it was reinvested or not.

[Mike]

Mark,

That is what I understand Distributed Distributions to mean. In my case, the only "reinvested" amounts are money market dividends. However, the amount here is nowhere near the difference between DD and the sum of all distributed income types.

The "Reinvested" box in the distribution dialog is not checked for any investments which is why I am at a loss to explain the difference.

I would really like to be able to send my Total Return report to clients but I cannot do that so long as they do not cross foot. As noted, they will only cross foot if I use the included "Distributed Distributions" element. Using the components produces a different result.

Mike

[Mark]

Hi Mike,

Are you including all of the distribution types in your calculation comparison? There are more than just those 3 types of distributions. Try creating a "Distribution Summary" report, and this might highlight where the problem is coming from. You will see all 8 distribution types listed, and then the total on the right. The 8 specific types of distributions will add up to the total.

[Mike]

Hi, Mark,

OK Here are the results. Please explain:

Dist Summary Report- (these are the only dist types present)
Div Inc 21,829.16
Interest 747.50
Fees -2,154.57
Total Dist 20,422.09

Portfolio Performance Report-
Dist Dist 16,526.95

Difference = 3,895.14

I cannot explain this difference. Can you?

Mike

[Mark]

Hi Mike,

The Distribution Summary report is displaying all distributions, both reinvested and distributed. Since you have 20,422.09 in total distributions, and only 16,526.95 in distributed distributions, you must have the difference in reinvested distributions. To find where these reinvested distributions are recorded, create a Custom report with the fields:

Reinvested Distributions (between)
Distributed Distributions (between)

The total of these 2 fields will add up to your 20,422.09 total distribution number. You can see what investments have reinvested distributions. Once you identify the investments with reinvested distributions, use the Data Register or Investment Transaction report to go look at their transactions.

[Mike]

Hi, Mark,

That was my guess originally. I only reinvest money market dividends but I will run the report. I assume that the Invested field includes reinvested income. I will let you know if that resolves the problem.

Thanks,
Mike

[Mark]

Hi Mike,

No, the "Invested" field in the "Portfolio Performance" report is only counting out of pocket contributions or withdrawals. This report displays what you started with, what you added, what you took out, and what you ended up with. The "Invested" and "Distrib." columns comprise what you added plus what you took out. The "Invested" column is all your purchases, minus all your redemptions. The "Distrib." column is money you received in cash from this investment. Reinvested distributions are reflected in the "End Value" and the performance figures, but do not affect either the "Invested" or "Distrib." columns. If you want to see your reinvested distributions you can create a custom report to add this information.

[Mike]

Hi, Mark,

That being the case, the Total Return is incorrect. If 1,000 in dividends are reinvested and the investment at issue declines to 900 the 100 loss is unaccounted for since ending value reflects to 900 but the 1,000 reinvested is not considered. Example: Buy 1,000 shares of ABC @ $10.00. Dividends of $1,000 reinvested @ $10.00 for 100 shares. No Distributed Distributrions are made. Total invested = $11,000 for 1,100 shares at $10/sh. With gain calculated by FM as End Val + Dist Dist - (Begin Value + Invested) you get erroneous results no matter the end value per share:

If the ending price/share is $11.00, EV = $12,100 - Invested per FM $10,000 for a gain of $2,100. However, the total investment is not $10,000 but $11,000. The correct Total Return is 1,100.

If the ending price/share is $9.00, EV = $9,900 - Invested per FM $10,000 for a gain of $-100. However, the total investment is not $10,000 but $11,000. The correct Total Return is $-1,100.

If the ending price/share is unchanged at $10.00, EV = $11,000 - Invested per FM $10,000 for a gain of $1,000. The correct gain is 0.00: $11,000 total investment less $11,000 ending value.

Certainly reinvested shares purchased have to be included in ending value. However, to exclude the reinvested amount leads to an incorrect total gain.

Mike

[Mark]

Hi Mike,

You are using the term "Total Return". Just to make sure we're talking the same, I think you are looking at the "Gain" field in the Portfolio Performance report, right?

This "Gain" field is the "Out Of Pocket" (OOP) gain, which is different than your tax basis gain. For tax basis gain, use a capital gains report, or a custom report.

In your example, where the ending price is $11, the Gain would be correct at $2,100. You only spent $10,000 out of pocket, and the ending value is $12,100. The reinvested dividends of $1,000 do increase your 'tax' cost basis, but not your "OOP" cost basis. The "OOP" cost basis is meant to show you your overall break even point. The only difference between OOP and tax basis is that reinvested distributions do not change your OOP basis, but they do increase your tax cost basis. The reason these reinvested distributions don't change your OOP basis is that you didn't spend any more money out of pocket in order to obtain these reinvested shares.

[Mike]

Hi, Mark,

Since we cannot build custom fields, I need some help here. Total Return is the change in invested net asset value + all income derived from the investment. I see no way to show the total invested in a position (OOP + reinvested) in FM. (You suggest that is Tax Basis.) or the difference between that amount and the various income elements. Certainly I can show the various income types. But, there needs to be a way to show the total investment not just OOP other than tax basis. But if tax basis is used how can the net gain or loss be shown using that amount rather than Beg Val + OOP invested (which is what FM uses)? Simply put, how can a show a true gain to incude reinvested dollars? That seems to be the missing link the way FM is currently structured.

As for the OOP vs Reinvested argument, I heard that for 30+ years in my tax practice. "I never got a check from the ABC fund. I reinvested everything. Why do I have to report the income?" The reinvestment option simply compresses a two step process into a single step. If you took a check and then endorsed it back to the fund the net result is the same. I simply need a way to reflect to true total return to a client. Right now I simply do not see a way to do that. I am sure you can point me in the right direction. At least I hope so.

Mike

[Mark]

Hi Mike,

I see no way to show the total invested in a position (OOP + reinvested) in FM.

Create a Custom report with the field: Tax basis, FIFO (ending)

This is basis calculated using the FIFO accounting method. It is the same as the OOP basis plus all reinvested distributions.

... if tax basis is used how can the net gain or loss be shown using that amount rather than Beg Val + OOP invested

Create a Custom report with the field: Tax basis unrealized gain, FIFO (ending)

As for the OOP vs Reinvested argument...

Fund Manager supports both the tax basis and a "OOP" basis. You can look at figures either way. The each have important meanings, but they are separate definitions. The tax basis is of course going to to tell you how much you have to pay in taxes, and is used in all of the capital gains reports. The OOP basis is meant to understand your overall break even point. When you get a distribution, and you reinvest it, this is a taxable event, but it did not change your overall break even point. This reinvestment doesn't change your OOP basis, but it does change your tax basis. For a little more explanation on this, you can see the online documentation:

http://www.fundmanagersoftware.com/help/def_oop.html

[Mike]

Hi, Mark,

I looked at the options in FM again. The tax basis is always given on a per share basis according to the documentation. Doesn't matter. There is still no way to show the true total return. What is need is field that calculates gain using "Total Distributions" vs "Distributed Distributions" assuming the documentation is correct when it defines "Total Distributions" as Distributed + Reinvested distributions. Unfortunately FM does not provide a means to define such a custom variable. Too bad it would save a lot of trouble. The data fields exists. So, unless you can come up with something, no advisor has way to report true total returns. For that matter no user can see total returns without using pencil and paper. I would suggest you name the field "Total Return".

This anomaly also suggests that the ROI reported may not be correct either. Might be wrong here. I will have to look at the definition. If all the generated income - distributed and reinvested - us used then we're OK. If not the ROI figures are also incorrect.

Sorry to be nit picking but many of my folks read and scrutnize their reports. How do I answer them when the call me and say the numbers do not compute or why aren't reinvested dollars taken into account?

Mike

[Mark]

Hi Mike,

Did you look at the fields I mentioned in my last post? Those are not per share numbers, they are total dollar values. I think at this point, it may be best to continue this with a phone call. Please give me a call at (480) 705-0129 when you have a minute to talk.

[Mike]

Hi, Mark,

I did look at those fields. When I use "Tax Basis Unrealized Gain" in the report it still does not cross foot. (The fields are: Beg Val, Invested, Total Dist, End Value, Tax Basis unrealized Gain.)

I also noted in running a report that "Total Distributions",which supposedly includes Reinv and Dist distributions, are less than "Distributed Distributions". Total distributions should be larger by definition. What is interesting as that for every security the two are the same except for money market accounts which as I mentioned earlier are not distributed but reinvested. So the individual securities data clearly indicate that Tot Dist > Dist Dist but the grand totals show Tot Dist < Dist Dist. Another anomaly I do not understand.

I will call you this afternoon so you can lead me out of the wilderness.

Mike