abuss368 wrote: ↑
Thu Nov 07, 2019 3:29 pm
I may be misunderstanding. If a company (held in a fund) pays a dividend, the fund collects the dividend, and the fund will either reinvest the dividend or pay the fund shareholder. Agree there is zero impact at that moment in time (accounting and not economic). If the fund holds on the dividend and either pays to fund shareholder or reinvests for fund shareholder by year end, there could be impact as the NAV will have either increased, decreased, or no change.
Is that a fair assumption?
No, this is not how it works. I have a pretty clear idea of how it works since I was deeply involved in the mechanics.
Cash coming in from dividends, the amount of cash held by the mutual funds, and the redemption / purchase / exchange are 3 separate things and are managed independently. There are some interconnecting pieces so you have to be aware of the other 3.
Here is a example which might help out.
A stock goes ex-div date on 12/27/2019 for $100. The accrual income general ledge is increased by $100.
The mutual fund distributes on 12/31/2019. Mutual funds must distribute all income by year end so they can send out 1099s. Share NAV is adjusted, etc. Lots of accounting stuff happens, very little economic stuff happens.
Are the distributions paid out in cash? eh - maybe. Portfolio managers liquidate assets to cover this. This is the little bit of economics stuff that happens. That being said, this operates exactly the same when you put in a sales order on any other day. Is it busier? Sure - but that is in scale, not substance.
Lastly - and here is the kicker - the stock went ex-div on 12/27/2019 actually pays out the cash. Maybe it is 1/15/2020. Maybe 6/30/2020. Does not really matter. The portfolio has fresh cash. They will treat that fresh cash exactly the same way as if you had purchased new shares in the mutual fund. Most likely invest. Portfolio managers are really encouraged to invest and not just sit on a horde of cash.
I hope this example helps.