How is this season's Harvest? | BetaShares

How is this season’s Harvest?

BY Matthew Leung | 26 August 2015
Share

It’s been 10 months since our BetaShares Australian Dividend Harvester Fund (managed fund) (ASX Code: HVST) has been launched and since that time it has consistently been one of our most popular Funds, including being the Fund page with the highest website traffic in our stable. With this in mind, I figured a blog post taking a look at the Fund and how it has been delivering on its objectives would be useful (to make things more interesting I’ve put a little sidebet of a morning coffee within the Distribution Team that this might be our most popular blog post too!).

The Harvester’s Objectives

The objectives of the HVST Fund are to provide:

  • 1) Large cap Australian equity exposure;
  • 2) Regular monthly income with the aim of at least double the level of income compared to the broad Australian market on an annual basis; and
  • 3) A smoother ‘investment’ ride due to the potential for reduced volatility and cushioning of downside market risk.

Objective 1: Large cap Australian equity exposure

Whilst HVST does  not seek to beat the large cap equity market over time (although it may potentially do so), there is a clear similarly in the path the fund has taken since inception compared to large cap Australian shares. To illustrate this, we have used the S&P/ASX 50 Index as an indicator only (The Fund is not benchmarked to the S&P/ASX 50 because there will be potential periods of outperformance or underperformance versus the market, particularly over a short time frame as the fund and the market do two completely different things).

1Source: Bloomberg. Past performance is not an indicator of future performance.

Result: Objective met    

Objective 2: Regular monthly income with the aim of at least double the level of income compared to the broad Australian market on an annual basis

The numbers below compare the HVST income yield to that of the S&P/ASX 200.

2
Since inception the HVST fund has met its objective of providing monthly income and as you can see from the numbers above, with only 9 months of history to date the Fund is well on track to generate at least double the net/gross yield of the broad Australian share market on an annual basis.

Result: Objective on track

Objective 3: A smoother ‘investment’ ride due to the potential for reduced volatility and cushioning of downside market risk

The annualised volatility of HVST since inception has been 41% lower than that of the S&P/ASX 50 as shown in the table below:

3
Source: Bloomberg. Period: 3/11/2014 to 18/8/2015. Past performance is not an indicator of future performance.

 And how has HVST helped cushion portfolios against potential downside market risk?

Given the bumpy two months we’ve just experienced with the Greek debt crisis flaring up (again), the steep and swift correction in the Chinese markets and the uncertainty within our own markets, the current period provides a good illustration of how HVST may potentially be able to cushion portfolios against downside market risk. Now, I would like to stress that HVST is intended as a long term hold strategy and the fund does not aim to beat the index. Therefore, there may be periods of outperformance and underperformance but the purpose of the below chart is to highlight the effectiveness of the Fund’s protection strategy during volatile market conditions.

4Source: Bloomberg. Past performance is not an indicator of future performance.

To put it in more stark perspective, the below charts show the performance of HVST versus the Big 4 Banks (CBA and NAB in the first chart, WBC and ANZ in the second) since the S&P/ASX 200 reached a high of 5996.4 points on the 13th of April:

5
6Source: Bloomberg. Past performance is not an indicator of future performance.

Result: Objective met    

Recap on benefits of HVST

Potential for:

  1.        Attractive income and associated franking credits distributed monthly
  2.        A smoother investment ride
  3.        Potential for some downside protection against market risk

27 Comments

  1. So am I wrong in assuming that what you are doing is ….
    monthly – distributing the dividend … then you are distributing some of our capital back to us that is equivalent to the franking credit we will be able to claim at tax time. i.e. you are distributing the franking credit “monthly” which is impossible isn’t it ?
    then at tax time we can get the actual franking credits and can keep it or reinvest it ?
    so as a result of this the HVST share price decreases slightly over time – around .25% per month or 3% p.a. ….. due to capital being returned ?

    1. BetaShares  |  August 28, 2015

      Gary,
      We are indeed distributing the dividends received by the Fund monthly. However the franking credits are not distributed until end of tax year. The franking credits being referred to in this article are estimates which we provide when we announce the monthly distribution.

      Hope that helps,
      BetaShares

  2. how do you distribute franking credits monthly – when they are only available at tax time ?

    1. Alistair Mills  |  May 28, 2018

      Hi Gary,

      We provide an estimate of franking credits for each monthly HVST distribution. The final franking credit amount will be stated on your annual tax statement at the end of financial year.

  3. BetaShares  |  August 28, 2015

    Phil, Thanks for this – what you mean by Mz’s?

  4. How concerned should we be at the continual drop in dividend from month to month? Monthly income has dropped considerably over the life of this product.

    1. BetaShares  |  September 9, 2015

      Hi Pete,
      HVST’s distribution has been within 2 cents for the life of the Fund and will always be related to actual dividends received by the underlying exposures.

  5. BetaShares  |  September 9, 2015

    Pete,
    One more point we’d make on this – to date each individual distribution has provided a cash yield of 0.9%-1.0% based on ex-price, so actual dividend yield has not changed since inception

  6. margaret  |  September 16, 2015

    Is that right what Gary suggested?
    Does the share price decrease over time, Gary said by 3%pa due to capital being returned in the monthly dividend.

    1. BetaShares  |  September 17, 2015

      Hi there,
      No, this is not correct. There is no capital being returned in the monthly dividend. Instead, we are returning the dividends earned on the underlying shares. As such, the share price will decrease or increase over time largely due to the underlying share price movement during the time these investments are held. That said, if all the monthly distribution is taken out as cash each month, and depending on the underlying performance of the shares, it is not impossible that the unit price of HVST will decline (i.e. assuming 12% p.a annual distribution if total return on the underlying portfolio is less than 12% you would expect capital value to decrease). This is why we often suggest to investors who are interested in income to consider how much of the monthly distribution they are seeking and retain a partial distribution reinvestment plan.

  7. Hi,

    There seems to be a lot of confusion about how you are able to return such a great paying dividend each month on this etf. I know you have already answered this, but a lot of people tell me that this etf basically distributes some of our own capital back to us each month along with dividends earned.

    Please confirm whether this etf is distributing some of our own capital back to us each month or not. Because if you aren’t, this etf is really lagging the performance of the market over the last 3-4 months at least… I’m also aware that it’s not meant to perform with the market, but nevertheless…

    1. BetaShares  |  September 18, 2015

      Hi Chris,
      Thanks for your question. The primary purpose of the harvester strategy is to provide investors with attractive dividend yields, and is the primary way we derive our high distribution yield. The distribution components of our monthly yields are set out in the monthly distribution statements and effectively derive from the income earned from the underlying stock portfolio held by HVST.

      Note also that the performance of HVST over the last 3 months (to 17 September 2015) has been -3.2%. This compares to performance of the S&P/ASX 50 of -6.6%, so actually there has been substantial outperformance of HVST vs the broad stockmarket. Note when comparing performance it is very important to look at “total returns” (i.e. capital growth + income) rather than price performance given HVST’s yield strategy.

      Hope that helps

  8. Hello Matthew. The concept behind this ETF is great – especially for those who can take advantage of franking credits. One thing though – because of the nature of your trades – you invariably sell shortly after the dividend is paid, is it therefore likely that for most shares that you trade there will be a small capital loss? (The price of bank shares – as they go ex-dividend – always seem to drop by roughly the same percentage as the dividend). Thanks.

    1. BetaShares  |  September 28, 2015

      Hi Greg,
      Thanks for your comment. The dividend rotation part of the strategy is designed, by definition, to sell as the underlying stock goes-ex. As a result you can certainly expect those stocks to reduce in value at that time by the amount of the dividend. It is indeed therefore likely that, ex any other factors, you would expect capital to reduce over time. Interestingly, however, there is a decent body of research that indicates that there exists a ‘dividend run-up’ phenomenon, whereby dividend paying stocks appear to historically run up in the days prior to an ex-date. Feel free to contact us if you would like to know about this.

      That said, absent distribution reinvestment, the fund is not expected to be a fund that has significant capital growth, which is expected given the very high dividend levels that are paying paid out.

  9. Steve  |  October 8, 2015

    Is there a fixed amount of shares in the fund?
    Or if I buy shares the the size of the fund increases.
    The PDS does indicate that share holder reimbursement is mainly from dividends but can be from part of the capital, is this correct? If so has any capital been returned as part of the monthly dividend reimbursement?

    Cheers
    Steve

    1. BetaShares  |  October 11, 2015

      Hi Steve,
      Like all ETPs HVST is open ended, so the number of units in the fund increases and contracts with demand and supply – for more information on this, see an earlier BetaShares Academy blog (http://www.betasharesblog.com.au/etf_creation/).

      There is no capital being returned in the monthly dividend. Instead, we are returning the dividends earned on the underlying shares.

  10. Hi Gary,

    I apologise if this was a resend. Was an error initially.
    Considering that the ETF is currently about 16% grossed up yield. I would have my reservations due some truth over the “efficient market hypothesis”, and expect at least a certain % is needed to be reinvested to protect the capital value of the investment. How much would you advise to be reinvested, 2 to 4 % ?

    Got me thinking, a retired couple with a million dollars invested in this bringing each of them 80k income would in theory, still allow them to continue to invest in leveraged properties without working a day in their future life. Am I dreaming ?

    1. BetaShares  |  December 28, 2015

      Hi Barry,
      Thanks for message. You are absolutely correct that if the distribution reinvestment plan is not utilised, the capital value of the investment will likely drop. As you will be well aware, there are no ‘free lunches’ in investing so you cannot expect to receive very high income without having some effect on capital value. Note however, that the franking credits are, in some ways, a ‘free lunch’ as they have no impact on capital. Due to the strategy of HVST, the franking levels on the fund are almost double those of the S&P/ASX 200 or S&P/ASX 50.

      In terms of the level of the DRP that we find investors are using, we are finding that a relatively popular strategy at the moment is to re-invest 50% of the income in order to ameliorate the capital detraction.

      Hope that helps,
      BetaShares

  11. Hi,
    I’ve recently invested in HVST on a combined value and stability basis, hoping that the share price slide had bottomed.

    I am now however wondering whether you customize the timing of selling shares after they go ex div. On average the ex div price drop of most blue chips recovers significantly within a month or so. Could you detail your approach including whether you adopt any time allowance in anticipation of some short term price recovery after the ex div date, particularly in a rising market trend, which may be happening now. Because you are obligated to provide monthly returns I am wondering whether this prevents you from holding shares after ex div, possibly to the detriment of investors, especially in a rising market?

    1. BetaShares  |  January 31, 2016

      Hi Peter,
      Thanks for your comment – the portfolio of HVST is rebalanced approximately every 2 months (60 days) and thus the portfolio is able to benefit from some price rises should they be apparent. In addition, in order to qualify for the franking credits which are a critical part of the strategy, Australia tax law requires holding stock for at least 45 days.

      Hope that assists,
      BetaShares Client Services

  12. If $100,000 was invested in HVST, approximately what return could an investor expect each month ?
    Also, does an investor have to wait until the end of the financial year to obtain the franking credits ?

  13. David  |  January 4, 2016

    Why has the dividend not been updated for the distributions on the website?
    Regards
    David Arnold

    1. BetaShares  |  February 2, 2016

      David,
      Apologies for this – dividends now updated on website.

  14. So what about the brohoha about imputation credits? What then for the fund?

    1. BetaShares  |  March 15, 2016

      Hi Fiona,
      Obviously any change to the franking credit regime will change investment outcomes for HVST, although, it will, of course change investment outcomes for all stocks which have franking credits associated with them (including the banks, Telstra, woolworths) and, for that matter, any fund which aims to improve franking credit outcomes!

  15. michael  |  February 28, 2016

    If the DRP isn’t used then the capital value will likely drop you have said in one of your earlier replies. Does this mean that over time the cost of new units will theoretically approach 0? Does this mean the fund has an implied future end date? I kind of assumed that over the long term there would be marginal capital appreciation or at least capital stability.
    Thanks,
    Michael.

    1. BetaShares  |  May 16, 2016

      Hi Michael,
      Thanks for your comment. Over time, assuming no distribution reinvestment, it would be reasonable to expect the price of units to reduce over time. However, due to compounding, the funds value will never actually be zero (this is known as asymptotic behaviour). Put simply, if the fund is providing investors with 11-12% p.a. return in income, the fund will need to appreciate from a capital perspective greater than 11%-12% for the value of the units to remain the same (assuming no reinvestment of distributions).

Leave a Reply