While distributions for most of our managed funds will be paid in July, the Fixed Interest Fund, the Income Fund and the Balanced Fund (retail) will not pay a distribution for the six months to 30 June 2020.
This might come as a surprise to some of our investors, especially since one of the stated investment objectives for these funds is “generating income”. We do acknowledge that on occasion some investment options may not pay an income distribution. Still, some of the underlying assets in the Fixed Interest Fund, the Income Fund and the Balanced Fund (retail) are likely to pay a distribution for the six months to 30 June 2020. So, why won’t there be a year-end distribution for these funds?
The low interest rate environment
The first thing to understand is that official interest rates are at historic lows. This has a knock-on effect on bond yields which are also at very low levels. This has been driven in part by the unprecedented measures taken by central banks around the world to cut official interest rates during the final quarter of 2019-20. The COVID-19 pandemic shook financial markets to the core and income-generating funds around the world have taken a hit.
The second factor is a little more complicated. Because interest rates have fallen, bond prices have risen. That’s what you expect to happen, and it’s why the value of the Fixed Interest Fund and the Income Fund has increased during this period. But it also means both funds have been forced to buy bonds at a premium – that is, above their face value. Under the accounting rules governing our funds, those bond premiums are amortised. In other words, the income generated by the funds’ underlying assets is used to offset the extra money paid for the new bonds. Unfortunately, that means the income is no longer available to be paid to investors as a distribution in July 2020.
Balanced Fund (retail)
The Balanced Fund (retail) has cross holdings in the Fixed Interest Fund and the Income Fund, which helps to explain why it is also not paying a distribution in July 2020. Across the entire portfolio of the Balanced Fund (retail), total expenses offset all income and the distribution due to be paid at mid-year. Due to the low yield environment and volatile market, there was significantly less income received in the fund in the second half of the year compared with the first half. The wholesale class of the Balanced Fund will still distribute an income in July 2020 due to its lower fee.
On the positive side…
While the Balanced Fund (retail) was down 2.3% for the six-month period, it has recorded a positive return of 1.5% for the 2019-20 financial year. The Fixed Interest Fund and the Income Fund both recorded positive performance during the six months to 30 June 2020. The Fixed Interest Fund returned 3.1% (retail) and 3.4% (wholesale) while the Income Fund returned 0.4% (both retail and wholesale) for the six months to 30 June 2020. However, this positive performance is reflected in the increased value of securities currently held in each fund and as such is not distributable through an income distribution. If investors do wish to realise capital gains in either the Fixed Interest Fund or the Income Fund for the six months to 30 June 2020, they can redeem part or all of their investment. However, investors should speak with an adviser or a tax expert before determining whether it’s appropriate for their individual circumstances.