By Scott Ronalds

Our funds paid out their distributions to unitholders yesterday. As a reminder, distributions represent the mechanism whereby the funds transfer to unitholders any interest and dividend income and realized capital gains they accrued over the year.

The Income Fund paid a larger than normal year-end distribution of $0.53/unit, much of which consists of capital gains. This is because the equity and corporate bond components of the portfolio have performed particularly well over the past several quarters and the manager adjusted a few holdings and booked some profits in the year.

The fund’s distribution is equivalent to roughly 5% of its unit price, and the amount that each unitholder received is added to the adjusted cost base of their investment. This can be confusing to investors, as it may appear as if the amount they have contributed to the fund is higher than their actual purchase(s). It can also lead to inaccurate performance calculations if investors assume that their gain (or loss) in the fund is the difference between the market value and adjusted cost base of their holding.

Consider the following example:

Steve purchased $1,000 of the Income Fund on October 1st at a price of $10.6968. He received 93.4859 units ($1,000/$10.6968).

  • On December 16th, the fund paid a distribution of $0.5326/unit. Steve received a distribution of $49.79 (93.4859 x $0.5326). This amount is added to his adjusted cost base, which is now $1,049.79.
  • The pre-distribution price of the fund at the time was $10.6684. The market value of Steve’s investment was $997.34.
  • After the distribution, the price of the fund dropped to $10.1358, but Steve received an additional 4.9123 units ([$0.5326/$10.1358] x 93.4859). The value of his investment remained the same at $997.34. (93.4859 units + 4.9123 units = 98.3982 units x $10.1358 = $997.34)

The value of Steve’s investment has fallen -0.3% since his purchase. However, if he were to calculate his performance using his adjusted cost base, it would appear as if his investment is down -5.0%.

The takeaway: distributions can meaningfully increase an investment’s adjusted cost base, and this figure should not be used in performance calculations. If you have any questions on the topic, feel free to give us a call at 1-888-888-3147.