Understanding the distribution of FISF – Forager Funds

Before the end of the financial year, we provided investors in Forager International Shares Fund (FISF) with an estimate of the distribution for the year ending 30 June 2023. The size – a distribution of zero – caused some surprise given the performance for the 12 months ending 30 June 2023 was completed at 19.01 %. There were more than a few questions. Here are some answers to common ones:

Why is the division zero?

Any distribution in respect of the International Equity Fund relates to income on which all investors must pay tax depending on their tax status. It also comes directly from the capital value of the fund. For example, if a fund pays a distribution of 10 cents, the value of everyone’s investment will immediately drop by 10 cents per unit. We operate the fund with a predominant focus on pre-tax returns, but we closely monitor any tax implications of our sales and try to avoid generating taxable income (and therefore distributions) where possible. As there were realized losses carried forward from the financial year ending 30 June 2022, we were able to offset any realized capital gains against these losses to avoid taxable events for investors.

What should I do if I usually take part or all of my distribution as cash?

If you require cash from your investment, you can always sell a small bundle of units each year. However, our goal is to keep taxable income as low as possible while optimizing returns.

Why is distribution different from return?

While the return in a given year is based on realized and unrealized gains, we only distribute realized gains. In some years, there may be many unrealized gains, which would result in higher returns than are distributed. In other years, we might realize 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 that year. And in other years (like this year), realized gains may be offset by realized losses from the previous year, resulting in a fund yield that is much higher than what is distributed.

What happens after June 30, 2023?

As there has been no distribution in the Forager International Shares Fund, unit prices will continue to be flat. There will be no diminution of capital which would have occurred if there had been a distribution.

What should I expect in the coming years?

The fund’s investment strategy is based on generating capital gains from investments in unloved and undervalued stocks. While some of the underlying investments pay regular dividends, the return on the portfolio is usually low. The majority of revenue has historically come from capital gains and we expect this to continue to be the case in the future.

Therefore, distributions are likely to be uneven and unpredictable and should not be relied upon as a regular source of income. It is conceivable that a year of significant market decline could mean no distribution.

A FISF should be part of the growth part of your portfolio and any distributions should be considered part of that growth.

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