Good morning. Most of
my clients are in some mutual funds that
appear to have dropped in value suddenly, but fear not. The share prices have been reduced in
exchange for cash (or more shares in the case of the cash being reinvested). The value of our investments did not drop
from this--it's all just fine.
This is a normal activity for many mutual funds at this time
of year. The cash is a distribution of "long-term
capital gains", "short-term capital gains", and/or
"dividends"--not the usual monthly or quarterly kind, but special
annual distributions. Such are made per
regulations that require mutual funds to make some distributions directly to
clients instead of incorporating them into the Net Asset Value (share price) of
the mutual fund. Yes, it is a little
tricky to explain, but I am happy to provide more detail if you want. But it is normal, expected, and does not
represent an unusual reduction in value of our investments.
Example: In one account I reveiwed, the First Eagle
Overseas Fund dropped NAV from 22.83 at market close on 12/12 to 21.66 at close
on 12/13. That's a 5.1% drop in share
price, BUT the value of the fund's investments did not drop by 5.1%. How?
Well, on 12/12 the account received three chunks of cash (long-term cap
gains, short-term cap gains, and some dividends) totalling $747, and that was
reinvested into 32.7 shares at $22.83 (closing price on 12/12). So, prior to the special distribution, there
was $14,616 in that position and after the distribution/reinvestment it was $14,576… the $40 decline (about 0.2% of the value) is
attributable to the slight market decline that particular day.
Please contact me with any questions, of course. Thank you, and make it a great Friday!
--Gary
NOTE: I offer a
special "Thank You" to a certain client for reminding me that this
should be explained to everyone!
