A managed fund’s unit price reflects the value of the underlying assets and income that’s been accumulating in the fund. The accumulated income includes gains ‘realised’ when assets are sold during the year. The income is reduced by fees and expenses.
After a distribution is paid to investors, the value of the fund falls by the amount of the distribution because accumulated income of the fund is paid to investors, usually into their bank accounts.
Let’s look at an example. Below is a sample managed fund balance sheet showing its net asset value before a distribution, and after a distribution (ie ex-distribution).
| Value immediately before the distribution | Value immediately after the distribution | |
|---|---|---|
| Assets: Shares $800 and cash $200 | $1,000 (ie shares $800 and cash $200) | $800 (ie shares) |
| Liabilities: Management fees to be paid | ($100) | ($100) |
| Net asset value | $900 | $700 |
| Accumulated income | ($200) | – |
| Unitholders’ equity | ($700) | ($700) |
| Total unitholders’ equity | ($900) | ($700) |
The income that was accumulated in the fund of $200 is paid out to investors at the time of distribution – the assets reduce by the amount of the distribution paid to investors, in this case cash of $200, and the accumulated income (effectively a liability to pay investors) is extinguished.
Unit prices are calculated as the net asset value of the fund, divided by the number of units on issue. In the example above, if the number of units issued to investors is 1,000, the unit price will drop from $0.90 to $0.70. The difference in the unit price before and after the distribution is $0.20 which is the amount of distribution investors were paid.
Investors haven’t lost any money; the value of their investment in the fund has dropped by the amount of income they’ve received.
It’s similar to when a listed company goes ex-dividend – its price drops by the dividend paid.
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