Help calculating net gain of a Mutual Fund

[PuckiTwo]

I am in the process of moving my RSP account to a DIY account. The rest of the portfolio will stay with a FA.

This account includes a MF with a big Return of Capital and a MER of 2.51% which I would like to sell because in my calculation the net gain gives me less income than if invested otherwise. I don’t want to make a mistake and would like to ask if any of you have a formular with which to
calculate the “real” return without considering Return of Capital. This is what I did:

Original investment $5000 (posted figures are fake!) I have held for 25 months.
I received total disbursements of $800 ($720 ROC + $80 dividends)
Book value is now $4280
Market value is now $4500.
If sold the capital gain would be $4500 -4280 = $220.
Adding the $80 dividends received, this makes a total gain of $300 or 6% over 25 months = approx.
2.88% annually.

When I informed the broker about the selling the MF he advised strongly against the sale as he
views it like that:
Present market value - present book value + the annual distributions to arrive at a total return over
the 25 months of 20%

Which one would you consider correct? Your help is highly appreciated.. Pookie

[HaroldCrump]

$5,000 invested on 7/1/2010 (i.e. 25 months ago) with current value of $4,500 and $800 in distributions yields an annualized IRR of 2.83%.
Ignoring taxes, of course.
I did not distinguish between the type of distribution.

I have no idea how your broker is arriving at 20%.
It is not the total return either.

[PuckiTwo]

$5,000 invested on 7/1/2010 (i.e. 25 months ago) with current value of $4,500 and $800 in distributions yields an annualized IRR of 2.83%. Ignoring taxes, of course. I did not distinguish between the type of distribution.
I have no idea how your broker is arriving at 20%. It is not the total return either.

Harold, thanks a lot for your help. I am glad that I was not totally off, the broker was very insistent that he was right, he may have factored in the Return of Capital - who knows. It is great to have this forum for back-up and learning. Thks again.

[humble_pie]

i believe harold *did* factor in the return of capital & so did i when i thought about your figures.

i get the same annualized return over 25 months of just under 3% as you do, taking into consideration all distributions plus downward market movement in the fund itself.

i'm another who does not understand what your advisor is talking about. No one - no advisor, no investor - can neglect that startup amount of $5000. It should enter into every calculation save & except for those who do not hold this fund, who are considering a purchase today for the very first time, who are therefore looking at current yield only.

[PuckiTwo]

i believe harold *did* factor in the return of capital & so did i when i thought about your figures.
i get the same annualized return over 25 months of just under 3% as you do, taking into consideration all distributions plus downward market movement in the fund itself.
i'm another who does not understand what your advisor is talking about. No one - no advisor, no investor - can neglect that startup amount of $5000. It should enter into every calculation save & except for those who do not hold this fund, who are considering a purchase today for the very first time, who are therefore looking at current yield only.

Humble Pie, thks a lot for the time you took to help me. At first I did not want to post the original question as I thought that is "kindergarden mathematics" but then the broker became very intimidating - "and who I am to know as a learner".

Your and Harold's response give me the psychological confidence for being on the right track. that's all I needed as a newcomer in DIY: I am selling the MF as I had planned originally and will move the RSP, of which the fund is a part, to a DIY brokerage (got good advice from you, more about that in a later thread). This move is part of my "Artichoke strategy" which you suggested when I posted our portfolio a few months ago and I had a whole Christmas tree lightening up, that I don't have to do everything all at once, that taking time I can get step by step into investing.

In addition, we are in the process of checking up on a number of investments which are in our portfolio of which we are not certain and hope that this forum can assist me in forming a decision. Big Thanks to HP and HC. Pook.

[humble_pie]

pucki i believe you are doing excellent research & you are being highly responsible esp with moving your assets gradually, one part at a time, as you find your sea legs in DIY investorland.

however it does not surprise me that the broker would be somewhat more intimidating than usual. Advisors are not happy to see clients slip away to self-managed portfolios. Such a move can actually make them quite angry. There are cmf forum members who have lived through this experience & described it here.

if one thinks about the situation from the advisor's point of view, one can easily see why they are reluctant to cooperate. Why should i make any further effort about this account, they might ask themselves, It (the account) is going to move away, in fact it's as good as gone.

it's true that some DIYers have crafted good working relationships with financial advisors who understand & accept that a good portion of such clients' assets will be out of their grasp fee-wise. But i think these successful relationships all begin with the DIY element present from the getgo. They are never a situation in which a client has been docilely paying large fees & accepting an advisor's suggestions like a little lamb for years & years; then suddenly client ups & announces he is removing a portion of the account to manage himself & maybe the whole thing as soon as he can learn how ...

in these latter circumstances it's understandable that an advisor in the process of being dumped is not going to spend his time helping an outbound client. Technically, one might wish that such advisor should be content with the fees he's still getting, but i don't believe human psychology works like that.

i'm writing this to suggest that it's possible your advisor relationship may be rockier than you've been thinking. There would be various things you could do. At one extreme, have a frank talk with the advisor, explaining how grateful you are & what is the time frame for the plan to ultimately manage the entire portfolio. At the other extreme (if advisor is not agreeable) would be acceleration of the total DIY project.

[Cal]

Also...after 5 years you may still have a small % penalty when you sell out of your MF units. Do you due diligence in this regard first too.

[PuckiTwo]

Also...after 5 years you may still have a small % penalty when you sell out of your MF units. Do you due diligence in this regard first too.

Thks Cal. We did, it's a small amount and it will erase the equally small gain we had over the 25 months. Still convinced it's better to invest in something less costly especially if the fund continues performing badly.

Advisors are not happy to see clients slip away to self-managed portfolios.

if one thinks about the situation from the advisor's point of view, one can easily see why they are reluctant to cooperate. Why should i make any further effort about this account, they might ask themselves, It (the account) is going to move away, in fact it's as good as gone.

it's true that some DIYers have crafted good working relationships with financial advisors who understand & accept that a good portion of such clients' assets will be out of their grasp fee-wise. But i think these successful relationships all begin with the DIY element present from the getgo. They are never a situation in which a client has been docilely paying large fees & accepting an advisor's suggestions like a little lamb for years & years;
in these latter circumstances it's understandable that an advisor in the process of being dumped is not going to spend his time helping an outbound client. Technically, one might wish that such advisor should be content with the fees he's still getting, but i don't believe human psychology works like that.
i'm writing this to suggest that it's possible your advisor relationship may be rockier than you've been thinking. There would be various things you could do. At one extreme, have a frank talk with the advisor, explaining how grateful you are & what is the time frame for the plan to ultimately manage the entire portfolio. At the other extreme (if advisor is not agreeable) would be acceleration of the total DIY project.

I certainly agree with your psychological assessment. And the relationship has been indeed rocky for two years now because we are not "little lambs". Stopped contributing to the TFSAs under the FA's control as both accounts lost 50% capital and we are not going along with every suggestions the FA makes. When we moved to this bank we made very very clear that we will want to have our input in what's happening in the portfolio and that we may make our own buy and sell suggestions (always thru her/him) if we see necessary. The FA agreed to this but s/he doesn't seem to remember.
We hadn't planned to manage the whole portfolio ourselves and would like to keep the core portfolio with this FA, s/he has done some good work and to have a frank talk appeals to me. But if s/he doesn't see merit in our approach we will have to go another route. Thks again. Puck