Can a fund w/ a negative NAV growth have a big distribution for the year?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
HenryPorter
Posts: 161
Joined: Sat Dec 05, 2009 2:09 am

Can a fund w/ a negative NAV growth have a big distribution for the year?

Post by HenryPorter » Mon Nov 02, 2015 7:10 pm

I was listening to the Ric Edelman show this weekend and he pointed out FPPFX has an 82% distribution payout yet its NAV was down for the year, on the order of about - 8%. How can a fund distribute a taxable distribution even if its NAV had not accrued a positive gain? This must be an extreme example of the potential to buy a distribution. I could see if someone bought a fund in early December and got walloped maybe with a 10% distribution, but holy smokes, an 82% distribution?

User avatar
David Jay
Posts: 5687
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Can a fund w/ a negative NAV growth have a big distribution for the year?

Post by David Jay » Mon Nov 02, 2015 7:20 pm

I don't know the details of FPPFX, but this situation is very easy to imagine with a bond fund. A bond fund pays out the interest every quarter, but the NAV is based on the "redemption" value (i.e. what the market will pay) of the bonds.

Say a fund holds a bunch of bonds paying 2%, purchased when 2% was the going market rate. It would pay out 2% (less expenses) every year, or 0.5% each quarter. If the market interest rates go up to 5% one quarter, the fund would still pay out the 0.5% interest in that quarter, but the NAV would drop because the market value of those bonds will be less (a purchaser would need to buy the underlying bond at a discount because the interest payout is less than the market rate).

Now 82% is another animal, I suspect that there is a lot of leverage being used by that fund manager.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

The Wizard
Posts: 12362
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Can a fund w/ a negative NAV growth have a big distribution for the year?

Post by The Wizard » Mon Nov 02, 2015 7:22 pm

It's more likely a capital gain on something bought ten years ago that the manager sold...
Attempted new signature...

HenryPorter
Posts: 161
Joined: Sat Dec 05, 2009 2:09 am

----------------------------------------

Post by HenryPorter » Mon Nov 02, 2015 7:36 pm

--------------------------------------------------------------------
Last edited by HenryPorter on Sat Jun 10, 2017 10:41 pm, edited 1 time in total.

User avatar
Epsilon Delta
Posts: 7430
Joined: Thu Apr 28, 2011 7:00 pm

Re: Can a fund w/ a negative NAV growth have a big distribution for the year?

Post by Epsilon Delta » Mon Nov 02, 2015 7:37 pm

The Wizard wrote:It's more likely a capital gain on something bought ten years ago that the manager sold...
Yes it's a long term capital gain distribution. Most likely they sold everything they bought 6 years ago.

HenryPorter wrote:I was listening to the Ric Edelman show this weekend and he pointed out FPPFX has an 82% distribution payout yet its NAV was down for the year, on the order of about - 8%.
Just to get the terminology right. The NAV is down over 80% for the year. Distributions comes out of the NAV. Its the total return that is down about 8% (more exactly down 2.5% on Nov 2.)

The Wizard
Posts: 12362
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Can a fund w/ a negative NAV growth have a big distribution for the year?

Post by The Wizard » Mon Nov 02, 2015 8:13 pm

This is why in a taxable account particularly, it makes much sense financially to hold a index fund, typically with zero or very little turnover...
Attempted new signature...

HenryPorter
Posts: 161
Joined: Sat Dec 05, 2009 2:09 am

---------------------------------

Post by HenryPorter » Mon Nov 02, 2015 8:33 pm

-----------------------------------------------------------------------------------------

Post Reply