“Why is my fund on the statement showing a loss, when the fund performance is showing a gain?” is an all-too-common question from mutual fund investors.   Or, the investor just sees that the fund’s  ‘Book Value’ is similar to ‘Market Value’ and assumes the fund is a dud.   ‘We’ve owned this for ages and it isn’t going anywhere, should we sell?”

In short, Book Value or Adjusted Cost Base (ACB) compared to market value simply  highlights any embedded unpaid capital gains taxes, rather than any indication of your performance or investment experience.  Performance should be evaluated instead by comparing market value relative to net invested capital – the sum of all purchases less all redemptions.  Net invested capital is not typically reported on investors’ statements as the statements were designed to report assets, activity and tax positioning to clients, not performance.

Mutual funds that earn interest or dividends will distribute these earnings to investors who then report them on their taxes at year end.   When investors purchase a mutual fund, they can elect to receive these distributions in one of two ways – in cash, with cash paid to their account, or reinvested which uses the distribution to buy more units of the fund.

With cash distributions, any distributions are paid out in cash directly into the account. For a fund where the market value of the securities was pretty constant for a one year hold period, if +5% was earned in interest and dividends, the book value and market value of the fund on the statement would remain the same as it was at purchase. This despite the investor’s account value increasing by the +5% in cash distributions.  If not seeing the distributions an investor might just see book value mirroring market value and think ‘this fund hasn’t done a thing all year’ when in fact they are up +5%.  After five years of this they’d be up +25% but might think their $1000 hadn’t done anything but go sideways.

The other option for distributions is to reinvest.  In the example above, when distributions are automatically reinvested, the book value increases by the same amount as the distributions.  At the end of that five year period book value would show $1,250 (if we ignore compounding) and market value would be the same.  Again, the investor might think their investment hadn’t done anything.  Remember though, their original invested capital was only $1,000, so at $1,250 they’re up +25%.

The table below illustrates these two examples:

Distributions are common features associated with mutual fund investments and they are ultimately a means to benefit investors.  However, they also tend to be a source of confusion due to the way investment statements present book value and market value, ignoring the benefit received from distributions.

As always, we are happy to walk through the performance of an investment with a client who has a question about it.   Just remember that the statement is not articulating your performance or investor experience – it is simply a representation of your tax positioning and a summary of your assets/activity.