Welcome to this weeks’ short but hopefully very useful piece! We were talking about dividends recently, and that prompted some conversations about the difference between ‘Accumulation’ funds and ‘Distribution’ funds for investors. To my surprise there was a lack of clarity around this – and to my further surprise I don’t think I’ve ever really mentioned in all past 200+ podcasts and 170+ Blogs! So here’s a quick hit:

Distributing Funds:

You might already own direct equity, shares in a company that you bought. If they pay dividends then you’ll likely receive a cheque or a bank transfer every year based on the level of dividends per share they pay to their shareholders. Dividends are taxed as part of total income, and as such while you benefit from the income, it is taxable of course.

If you are investing in funds, you are investing in a basket of shares, as opposed to single companies. Depending on the type of fund/trust that you invest in, you might still benefit from dividends. If you invest in a fund which is listed as ‘Distribution’, any dividend income that the fund receives will be paid out to you each year as an investor.

This may or may not be deemed as a good way to go about it. The benefit is that you receive some income from the fund, the downside is that it is income that you may or may not have needed – a significant portion of which is now gone to Revenue in taxes.

Accumulation Funds:

Accumulation Funds do exactly as it says on the tin. When dividends are received they are immediately reinvested in the underlying assets/equity of the fund instead of paying that income out to shareholders. You could see this as a negative; you aren’t getting an income from the fund. But of course, if you did actually want or need an income, you can just take the income right!?

The biggest benefit to us as investors is that compounding of returns. Not only is the capital value of the fund compounding, the dividend income generated is also compounding. An Accumulating fund is working doubly-hard to generate long term returns, helping the fund value and our investments to grow.

Real Life Example:

BlackRock are one of the largest and most respected fund managers, respected at least within the financial planning profession! They have several fund domiciled and managed in Ireland, all MIFID II regulated funds and therefore total transparency. Their funds are audited and return annual reports showing incomes, expenses, performances etc. As a result, we can see the actual incomes of various funds. Blackrock of course are not alone in how they operate in this regard, but are the example I’m sharing here.

Taking two of their funds for example iShares Emerging Markets Index Fund and their iShares Developed World Index Fund, to assess dividend incomes. Both of these funds are ‘Accumulating’ and so all dividends are retained within the fund and reinvested, adding to the fund value and therefore any investor’s asset values.

• iShares Developed World Index Fund: Dividend Income for 2020: $302,907,000
• iShares Emerging Markets Index Fund: Dividend Income for 2020: $313,191,000

Each of these funds received over $300m of dividend income alone in the financial year 2020. You would imagine that the fund held a significant shares of thousands of companies across the world in order to be given that level of dividend payments!? You would be right! According to their audited accounts, financial notes state that the total financial assets/equity holding for 2020 were:

• iShares Developed World Index Fund: $13,158,213,000
• iShares Emerging Markets Index Fund: $10,50,337,000

Based on their respective level of equity holding, the dividend yield on the Developed World Index Fund was 2.3%, and on the Emerging Market Fund was 2.9%. Neither of these funds by the way are dividend-focused funds – they are accumulating focused, but thanks to the fact that they own shares of the great companies of the world, who do choose to pay dividends, us investors are benefiting, on a compounding basis, from investing in the fund. Thanks very much 🙂

Of course, not all funds are as transparent – many don’t produce audited accounts – don’t state what if any dividends were paid – don’t clarify what expenses and costs were incurred in the running of the fund, or if any dividends were accumulating in your fund, or in the pocket of the manager that was managing the thing!

Which Is Best?

You may be in either the Accumulating or Spending phase of your own financial life; would you prefer to own an Accumulating or a Distributing Fund? Personally, it is Accumulating all day long. An accumulating fund benefits from the compounding of capital value and of reinvested income, it allows you to choose which portion of the portfolio to draw income from if and when you want income, it avoids having to receive unnecessary taxable income, and it is simpler – who doesn’t like avoiding wasting time and energy?!

Paddy.