Share funds shackled by previous losses
Many managed Australian share funds will not be able to make either quarterly or half-year distributions to investors this year due to losses incurred in 2008-09, according to some industry commentators.
As they are trusts, these funds are by law unable to pay distributions until they have soaked up realised losses, and the commentators suggest that many funds have found themselves in this position this year.
Money Management, for example, is in possession of a letter sent to investors by Aviva Investors High Growth Shares Fund stating it is not able to make a distribution for the quarter ending September 30, 2009.
The letter confirms that any realised losses within the fund must be offset by realised trading gains and income before a distribution can be paid.
“Despite improved market conditions and strong fund performance, losses carried forward from the 2008-09 financial year are yet to be fully offset,” it said.
Van Eyk research senior investment analyst Caitlin Ruddock said she thought a failure to pay dividends by managed Australian share funds would be “fairly prevalent” this year.
“There are a lot of accumulated losses out there,” she said, some of which would have been realised, particularly among hedged funds and “anything that has futures contracts”.
Funds would have to pay distributions out of capital as opposed to income if they intended to continue to pay distributions, she said, adding that some managers have already told van Eyk they would not do so.
Darren Withers, director of advice firm Elston Partners, said he was aware of a number of funds informing investors in the past two weeks they would not make either quarterly or half-year distributions this year.
He said there are also funds that generated 2 per cent or 3 per cent in total dividends for the past year but can only pay out a small proportion of that due to their losses.
“If these investors had held the same portfolio directly they would still have suffered capital losses for the year, but they would be able to collect all their dividends for their income needs.
“This is because a lot of Australian companies have been able to maintain their dividends through this period, and some have been able to increase it,” he said.
Recommended for you
In this episode of Relative Return Unplugged, hosts Maja Garaca Djurdjevic and Keith Ford are joined by special guest Shane Oliver, chief economist at AMP, to break down what’s happening with the Trump trade and the broader global economy, and what it means for Australia.
In this episode, hosts Maja Garaca Djurdjevic and Keith Ford take a look at what’s making news in the investment world, from President-elect Donald Trump’s cabinet nominations to Cbus fronting up to a Senate inquiry.
In this new episode of The Manager Mix, host Laura Dew speaks with Claire Smith, head of private assets sales at Schroders, to discuss semi-liquid global private equity.
In this episode of Relative Return, host Laura Dew speaks with Eric Braz, MFS portfolio manager on the global small and mid-cap fund, the MFS Global New Discovery Strategy, to discuss the power of small and mid-cap investing in today’s global markets.
