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Portfolio value dropped significantly in July? Not all is as it appears…

The new financial year has begun and financial markets do appear to be somewhat disconnected from the realities of the post-COVID world, yet the majority of portfolio values appear to have started the new financial year off on the wrong foot. Or have they?

Managed funds are popular inclusions in most portfolios; one transaction can provide access to specialist strategies, a broader range of underlying investments and provide diversification across- asset classes, regions and market sectors. They also provide access to investments that may otherwise be out of reach.

Portfolio’s that incorporate managed funds as an investment vehicle will fall victim to the ‘EoFY distribution’ effect, with valuations dropping the equivalent of the distributed amount yet the distributed amount has not yet been paid, understating your position.

Based on the profit or income it receives from the underlying investments, the distributions may include- Australian income, foreign income, tax deferred income or net capital gain components. It takes a few weeks for the fund managers to calculate their year-end position, distribute and update the unit price. Thus, in your portfolio reports, portfolio valuations will be impacted for a period time by:

  • Delay in unit price for the end of June- value will be incorrectly stated.

  • A change (drop) in price per unit- reflecting the distribution.

  • A delay in distribution receipt- skewing returns as the overall return figures (growth + income) are incomplete.

This managed fund feature is worth remembering mainly during the month of July. There are funds making monthly, quarterly or semi-annually distributions which in turn will be reflected in the respective end of month price for that particular fund. Under tax law, managed funds are required to make their final distributions at the end of each financial year, making the 30 June payments sizeable compared to other payments made (if made more frequently) and more noticeable.

Currently, there is a lot going on globally which is likely to impact financial markets and portfolios. Yet, before you fret about the capital value of your portfolio, especially in July, remember not all is as it seems.

Give the fund managers and administration platforms a few weeks to calculate, announce and administer the distributions for a true picture of your portfolio position.

In the meantime, if there is any further clarification you require please do not hesitate to contact us.

Disclosure Statement: This communication has been approved and issued by Sovereign Wealth Partners Pty Ltd ABN 18 607 071 367 Corporate Authorised Representative (No. 001233909) of Sovereign Capital Pty Ltd ABN 44 164 127 833, AFSL 456235.

General Advice Warning: Any advice included in this article and associated links is general in nature and does not take into account your objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. We do not endorse any information from research providers that we provide to you, unless we specifically say so.

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