Before opening a tracker fund I had a couple of questions about the Fidelity MoneyBuilder UK Index Fund (MT). They’re probably obvious to the seasoned investor, but I wasn’t sure, so I sent Fidelity an email to ask.
The first question was:
Is the fund an accumulation fund? If so, how do dividends get reinvested?
I was fairly sure what type of fund it was, but wanted confirmation. The second part was the bit I had misunderstood. I’d assumed it just meant that dividends, instead of being paid out, were automatically used to purchase new units. That’s not the case. Instead any distribution declared by the fund is reinvested in to the fund itself and therefore increases the value of every unit. So instead of getting more units, your existing ones go up in value.
The second question was:
If the unit price was £0.41 and I purchased £100 worth of units, I’d end up with 243 units worth £99.63. Where does the £0.37 go?
This seemed like an obvious question, but I’d made the mistake of assuming you can only buy units in whole numbers. It turns out that you can by fractions of units, so in the example above I’d get 243.90 units (I guess they round it off a little).
Note: I’ve not quoted Fidelity’s actual reply because it has one of those confidentiality clauses. Given the public nature of the answers it would probably have been fine, but it’s just not worth the hassle…
You’re confusing apples with oranges. The 5% dividend is reinvested in the Fid Fund, which increases the Fund’s total Nav (so you benefit when you want to redeem) but this has no effect on the Fund’s relationship with the tracked target FTSE. If the Fund’s 5% return is in line with the FTSE return over the same period, there is no discrepancy.
I just found this via Google when asking the same question you asked in point 1: how do dividends get reinvested? I’m still missing something!
Suppose the dividend for a year is 5%. That 5% is reinvested into the fund. If, as you say, your existing units go up in value, how does that affect the tracker? The value of the FTSE has stayed the same, but now the fund is up by 5%. That would leave a tracking error wouldn’t it? Clearly, this isn’t actually what happens!
I’m still trying to work this out. Any further explanation would be appreciated!
You mentioned in your other post the ability to buy small amounts of units with the Halifax Sharebuilder account for Â£1.50.
It is indeed a great service, but there the fractional units start to drive you crazy if you ever have to account for capital gains tax.
If your Moneybuilder fund is in an ISA, you’ll be saved any such reporting for tax hassles anyway. (Reason enough to use an ISA – Hurrah!)
I’m not a die-hard Fidelity fan (having worked in their stats & inv info dept), but I’m drawn to defend them here. There’s no difference between your holdings’ income being reinvested to increase the nav of the Fund as a whole, and your holding’s income being reinvested to increase the nav of just your holding. Mathematically, the two have the same effect on your holding. Although everyone else benefits from your holding’s income, you benefit from from everyone else’s holdings’ incomes.