Prior to the end of the financial year, we provided investors in the Forager International Shares Fund (FISF) an estimate of the distribution for the year ended 30 June 2023. The size – a zero distribution – caused some surprise, given the performance for the 12 months ended 30 June 2023 has been finalised at 19.01%. There have been more than a few questions. Here are some answers to the common ones:
Why is the distribution zero?
Any distribution relating to the International Shares Fund relates to income on which all investors need to pay tax, depending on their taxation status. It also comes straight off the capital value of the Fund. For example, if the Fund pays a 10-cent distribution, the value of everyone’s investment immediately falls by 10 cents per unit. We run the Fund with a predominant focus on pre-tax returns, but do keep a close eye on any tax consequences of our sales and try to avoid generating taxable income (and therefore distributions) where possible. Given that there were realised losses carried forward from the financial year ended 30 June 2022, we were able to offset any realised capital gains against these losses in order to prevent a taxable event for investors.
What should I do if I usually take some or all of the distribution as cash?
If you do require cash from your investment, you can always sell a small parcel of units every year. However, our aim is to keep the taxable income as low as possible while still optimising returns.
Why is the distribution different from the return?
While the return in any given year is based on realised and unrealised gains, we only distribute realised profits. In some years there may be lots of unrealised gains, which would mean returns higher than what is distributed. In other years we might realise gains by selling stocks that have been held for many years. In this case the distribution could actually be higher than the percentage return in a given year. And in other years (as is the case this year), realised gains could be offset by realised losses from a previous year, resulting in a Fund return that is much higher than what is distributed.
What happens after 30 June 2023?
As there has been no distribution in the Forager International Shares Fund, the units will continue to price at the same level. There will be no drop in capital, which is what would have happened had there been a distribution.
What should I expect in future years?
The investment strategy of the Fund is based on generating capital gains from investing in unloved and underappreciated stocks. While some of the underlying investments pay regular dividends, the yield on the portfolio is typically low. Most of the returns have historically come from capital gains and we expect that to be the case in future.
So the distributions are likely to be uneven and unpredictable and you should not rely on them as a regular source of income. It is conceivable that a year of significant market falls could mean no distribution.
FISF should be a component of the growth part of your portfolio and any distributions should be seen as a component of that growth.
