Look at total returns for the true picture

BY Justin Arzadon | 4 July 2017
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Total returns of an investment

If you had hypothetically bought the S&P/ASX 200 back on 1 June 2015, it was trading roughly at 5735 which is close to what the S&P/ASX 200 closed at today (in fact it was trading 5720 as of June 26th).  So does that mean you have finally just broken even if you are still holding today?

Not quite.

In fact, in this hypothetical example, you would have made money on your investment, on a total return basis (but only broken even on a price basis).

The difference between these two types of return is important for investors to understand, particularly those in high yielding funds such as our YMAX and HVST. And the difference between them comes down to income.

So, going back to the example above, in order to calculate total return on the S&P/ASX 200 investment you need to take into account all the dividends you have received over the period you have invested (and, if you are looking for what is known as a “gross total return”, your franking credits too)

So on a price return basis, your investment would appear “flat”, but on a total return basis (not including franking) your return is actually up 4.3% p.a.

ASX 200 Price vs total return

Source: Bloomberg. You cannot invest directly in an index.

The key message here is, when calculating the returns of a Fund or investment, an investor should take into account any distributions received. This can be confusing, particularly when online portals and services display only the “price return”, so a little bit of work is required to show the “true picture”.

Distributions are likely to be paid into your bank account if you have not elected to be part of the distribution reinvestment plan.  With these automatic payments, it’s not surprising that some people forget about these deposits when it comes to attributing the return of their initial investment.

For most investors, it’s much easier to remember how much their initial investment was (for example $50K) and then compare this to the value today based on the share or unit price, for example, $46K.  This $4K decline will have many investors asking ‘So where did that $4K go’?  ‘Did I “lose” that money in the investment’?

Well, it is possible that the investment has declined in value.  But it’s also worth noting that the price can drop without a decline in actual investment performance as well. Remember that dividend you received?  The price of a stock or ETF usually drops by approximately the amount of the dividend or distribution paid out.  So, you technically haven’t lost money, rather, that money is sitting in your bank account (assuming you haven’t spent it yet).  However, if the price of the stock rises from that lower post-distribution value, you’re actually in a positive position.  So whilst your brokerage statement displays the price change of your holdings in your account, you should be considering your “total return” which includes both the price change and all interest and dividends received.

A relevant example that raises queries from some investors is our popular HVST fund. The Fund’s current yield is ~11% p.a. and with such a high yield the investment may always seem to be heading lower unless you look further into performance.

Remember, the price of the fund will drop by approximately the amount of distribution paid.  Which means if the underlying exposure does not move higher or lower, the price of the fund will have declined by approximately ~11% over the course of the year.  Well, this does not necessarily mean you have been “losing money”.  In fact, investors in HVST (who receive all their income rather than using the Distribution Reinvestment Plan or “DRP”), may actually reasonably expect a decline in unit price over the long term and may still be satisfied with the outcome.  The long-term performance of the Australian market has been ~8% p.a.  The price of HVST should be expected to decline ~11% based on paying out the distributions.  So for the unit price of HVST just to stay on par, the underlying exposure would have to return ~11% year on year, which may not be possible every year. Of course, as I have argued above, this does not mean that the total return for this Fund will necessarily be negative, and in fact, it has been positive to date since inception.

I know that when looking at my own investments the price return by itself can sometimes look unimpressive. However, as long as I’m looking at the total return, I’ll have the most accurate picture of how my investment is doing (remember also that the benefit of any franking credits received will be on top of the total return).

23 Comments

  1. Tools like Sharesight can be really valuable for providing this true picture of returns, and they have free accounts available for those with small portfolios.

  2. Ian  |  July 5, 2017

    Interesting! The HVST product appears to be a value trap based on the $25 price at inception on 29/10/14 with a current price of $18.46. Your capital has been depleted by $6.54 with a 11% distribution of approximately $2.75 per annum. You are at best breaking even on your investment!

    1. Ilan Israelstam  |  July 6, 2017

      Hi Ian,
      You are approximately right regarding the performance but this has nothing to do with a ‘value trap’. Rather, the primary reason for lower performance has been the impact of the risk management overlay which by definition is reducing upside during rising markets.

      1. Gerard  |  July 6, 2017

        The 11% return is an anomaly! The distribution has been decreasing on par with the decreasing ETF price. One should not get stuck on percentages, as they can be deceiving. The July 2017 return is around 16 cents approx. compared to the original rates of around 21 or 22 cents.
        So if you bought the units at $25, the return is crap!

        1. Ilan Israelstam  |  July 10, 2017

          Investors are able to see total return performance for all our funds via the performance tab of our website. This includes longer term performance including since inception figures.

  3. Ross Donald  |  July 5, 2017

    Hi Justin,

    I have a slightly different view of the performance of your HVST and YMAX funds over a longer period than you demonstrate. I have a couple of tables (actual transactions) I would like to send to you if you could send me your email address. I can’t find anywhere on the site to attach documents.
    Thanks, Ross

    1. Ilan Israelstam  |  July 6, 2017

      Of course Ross – please send to info@betashares.com.au

  4. Camille Cain  |  July 5, 2017

    Thank you, Justin, for explaining total returns on investments in plain language. This is good information.

  5. Michael  |  July 6, 2017

    Again with HVST it appears concerning that the long Term price return of the Aussie market is not 11% , so does this mean that over the long term the price of HVST will in the End go back to Zero ?
    Or is it only for people in retirement and the franking credit payment will make up the difference if used to buy more units.

    1. Ilan Israelstam  |  July 10, 2017

      Hi Michael,
      That is essentially correct on a price basis, although of course you need to remember that investors should be focusing on TOTAL RETURNS (i.e. inclusive of distributions). As we have argued in posts, it is not appropriate to use capital returns as a basis for determining performance for high yielding funds like HVST.

      You are also right that HVST provides very strong franking credit performance (i.e. approximately double that of the Australian sharemarket) and so investors on low tax rates like SMSFs and retirees are a particularly good target for this fund.

  6. Losing Faith  |  July 6, 2017

    5 July 2016 to 5 July 2017 Bloomberg
    HVST Total Return = -1.3268%
    HVST Price Return = -12.5590%

    ASX50 Total Return = 17.4259%
    ASX50 Price Return = 10.6556%

    ~1875 basis points in fees and risk management overlay in 1 year?

    1. Ilan Israelstam  |  July 10, 2017

      Hi there,
      When one looks at the performance of HVST over the last 12 months, we have been in a situation where virtually all factors have been working against its performance. The underlying stock basket typically holds financials and REITS, both of which were sold off significantly (banks due to the federal levy being imposed, REITS due to the fact they are bond proxies). As such the stock basket has underperformed by 10% over this period. In addition, the risk management overlay which is expected to detract from performance in rising markets also contributed ~6% to underperformance. It is usual that funds like HVST experience under and outperformance during market cycles and we certainly do not believe that these conditions should be expected to continue at all times going forward

      1. Not sure anymore  |  July 19, 2017

        After monitoring since July 16 I have come to the conclusion that not only is the risk overlay an impediment to performance through poor timing ( almost always over short at the bottoms and under hedged at the tops) the hedge of ASX200 futures creates additional risk for the fund in that fund holdings are only a small subset of the ASX200 so there is correlation risk .

        In fact there are so many risks with this fund that are easy to overlook as has been seen this year with the fund just happening to be bank holding heavy at exactly the time the banks got crushed and also be so heavily weighted to specific stocks that are interest rate sensitive in a rising interest rate environment.

        A risk management overlay of just selling ASX200 futures which seems to be based on World stock volatilities rather than the ASX whilst providing some “first glance” comfort, on closer examination will go no-where near covering off on all the basis risks ( market vs market risks) that are evident if one wants to achieve anything near the return of the ASX200.

        On top of that a near 1pct management fee, I am starting to really have my doubts about the Dividend Harvester Strategy which is more and more looking like a bit of a wild punt rather than a considered income producing approach , particularly after the past years performance.

        1. Ilan Israelstam  |  July 19, 2017

          Thanks for your comments. We are in the process of producing a more detailed piece on HVST which we will distribute to unitholders and our clients. In relation to your specific concerns, we believe it will be most beneficial to discuss with our client services team members – please give them a call during business hours on 1300 487 577

          1. Not sure anymore  |  July 20, 2017

            Also I am wondering why is the market price consistently trading under the NAV when there are market makers supporting the price?

          2. Ilan Israelstam  |  July 24, 2017

            I think you will find that the prices of HVST trade very close to NAV, apart from the normal ‘bid-ask’ spread that effects all exchange traded products. If you check our website you will see there is an iNAV (indicative net asset value) available for HVST – if you compare this at any time to the price on offer from the market-makers you will find it is quite tight. According to the ASX monthly report HVST has an average bid/ask spread of 0.09% which is considered very tight

  7. Richard  |  July 6, 2017

    Hi Justin,

    Quote: You are approximately right regarding the performance but this has nothing to do with a ‘value trap’. Rather, the primary reason for lower performance has been the impact of the risk management overlay which by definition is reducing upside during rising markets.

    Question: are you for real? I thought risk management was to minimise down side (loss), not limit upside gain?

    Furthermore as an investor in HVST can unit holders expect without dividend reinvestment, on current projections HSVT will be valued at zero in 10 years (~ 10% return over ~10 years would imply = Zero HVST unit value)

    1. Ilan Israelstam  |  July 10, 2017

      Hi Richard,
      The risk management strategy employed by HVST aims at providing lower overall volatility and to defend against market losses. As the strategy essentially reduces portfolio exposure via the use of futures, it should be expected that during rising markets investors will receive less of upside potential than without the risk management overlay in place. Of course, the strategy also means that in falling or declining markets that, all things being equal, HVST should be expected to outperform. As the markets have been largely rising in the last little while the risk management strategy has reduced upside.

      In terms of the capital value of HVST, if one believes that the total return of the underlying holdings of the fund will be less than 11% per year, the value of the HVST units will indeed steadily decline. This is why we suggest investors should reinvest whatever component of the distribution they do not require.

  8. ian  |  July 7, 2017

    I am a recent holder of Ymax, but I have trouble understanding this conversation. If the asx-20 is up over the duration then I should enjoy a capital appreciation plus the distribution less fees. If the market is down then the value of the asset declines.
    Are you able publish the ymax price at 1st of july 2016 and at 30 th june 2017 plus the absolute distribution amount per eft
    Thankyou in advance

    1. Ilan Israelstam  |  July 11, 2017

      Hi Ian,
      Much of this conversation is related to HVST, rather than YMAZ.

      In relation to YMAX, you are probably aware that the effect of the options strategy is to give away a portion of the fund’s upside in exchange for income today. Generally speaking you should expect buy-write strategies such as YMAX to underperform the same basket of securities without an options strategy during a fast rising market, and outperform this basket without options in a falling or stable market. This means that if the S&P/ASX 20 is up over a time period YMAX may very well appreciate in value as well, but not by as much as the market alone. Should the S&P/ASX 20 decline in value you could expect YMAX to decline in value too, but perhaps not by as much as the market alone.

      In answer to your question, the total return of YMAX for the year to 30 June 2017 was 10.73%

      The unit price as of 1 July 2016 was $8.76 and at 30 June 2017 it was $9.07
      Distribution paid during this period are all detailed here: https://www.betashares.com.au/fund/equity-yield-maximiser-fund/#distributions

  9. bill nutton  |  July 8, 2017

    the last 12 months have produced a negative share price of 13..2% against a dividend of 11% a net loss of 2.2%, this result is worse than investing in a LIC company, am i correct

    1. Ilan Israelstam  |  July 11, 2017

      Hi Bill,
      there are a great number of LICs so hard to be precise about the comparison here.

  10. bill nutton  |  July 19, 2017

    compare to AFI

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