OEICs and UTs - Income distribution accounting

[Learner]

Hello everybody!

I wonder if you could help me to solve some doubts on this topic.

What actually determines how much the income distribution is? Must Unit trusts and OEICs distribute all net profits to unit holders at the end of the financial year and up until that point distribution amounts are discretionary? Why is it first set an estimated dividend rate on ex-date and some days later a final dividend rate is determined?
Could anyone give a description of the entries when the fund goes ex-dividend, and later when the final dividend rate is settled?

Many thanks!

[Gonzo]

Hello everybody!

I wonder if you could help me to solve some doubts on this topic.

What actually determines how much the income distribution is? Must Unit trusts and OEICs distribute all net profits to unit holders at the end of the financial year and up until that point distribution amounts are discretionary? Why is it first set an estimated dividend rate on ex-date and some days later a final dividend rate is determined?
Could anyone give a description of the entries when the fund goes ex-dividend, and later when the final dividend rate is settled?

Many thanks!

OK, there are two questions here.

All funds must distribute all their net income at least once per year.

Many funds distribute more frequently than once per year but interim dividends do not have to pay out all the income in the fund at that time. Monthly income funds for example might pay out a steady level of dividend each month and any extra that has accumulated at the end of the fund's financial year will bump up the final dividend.

That doesn't really matter (unless it is the income that you are mostly interested in) because any income in the fund that has not been declared as a dividend will be count towards the price of the units/shares, so you get the money one way or another if you sell.

As for the estimated dividend rates:

On the ex dividend date, the Fund Accountants will declare a provisional dividend rate based on what they believe the income in the fund is on that date.

Typically, this estimate is never exactly correct because more income may trickle in, or charges appear, afterwards that have to be accounted in the period before the ex date.

Eventually, when the Fund Accountants have dragged the auditors off the golf course to sign off the figures, then the confirmed dividend rate will be declared, which is usually slightly different to the one declared on the ex date in the case of final dividends. The provisional and final rates for interim dividends will not normally be changed.

Again it doesn't make a lot of difference to the investors, because income that is not declared as a dividend, counts towards the unit/share price. I say it doesn't matter, any accumulation units / shares that are purchased or sold during the ex-dividend period are potentially brought or sold at the wrong price, but the difference is negligible, we are talking in the order of 0.001% here.

In the four years that I worked at the customer facing end of the business, not a single punter ever asked about this.